Documents found in this filing:

ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended
February 3, 2007

OR

o

TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period
from to

Commission file number
000-21543

Wilsons The Leather Experts
Inc.

(Exact name of registrant as
specified in its charter)

Minnesota

41-1839933

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

7401 Boone Ave. N., Brooklyn
Park, MN

55428

(Address of principal executive
offices)

(Zip Code)

Registrants telephone number, including area code:
(763) 391-4000

Securities registered pursuant to Section 12(b) of the Act:

Common stock, $.01 par
value

Nasdaq Global Market

(Title of Class)

(Name of Exchange on Which
Registered)

Securities registered pursuant to
Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o

Indicate by check mark if the disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o

Indicate by check mark whether registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as
defined in
Rule 12b-2
of the Exchange Act).

Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o

Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ

The aggregate market value of the common equity held by
non-affiliates of the registrant was $69,913,423 based on the
closing sale price for the common stock on the last business day
of the registrants most recently completed second fiscal
quarter as reported by the Nasdaq Global
Marketsm.
For purposes of determining such aggregate market value,
all executive officers and directors of the registrant are
considered to be affiliates of the registrant. This number is
provided only for the purpose of this Annual Report on
Form 10-K
and does not represent an admission by either the registrant or
any such person as to the status of such person.

The number of shares outstanding of the registrants common
stock, $.01 par value, was 39,204,299 at March 23, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of Wilsons The
Leather Experts Inc. for the 2007 Annual Meeting of Shareholders
(the Proxy Statement), which will be filed within
120 days after the registrants fiscal year ended
February 3, 2007, are incorporated by reference into
Part III of this Annual Report on
Form 10-K(Form 10-K).
The Audit Committee Report is expressly not incorporated by
reference in this
Form 10-K.

When we refer to we, our,
us, or Wilsons Leather, we mean Wilsons
The Leather Experts Inc. and its subsidiaries, including its
predecessor companies. Unless otherwise indicated, references to
our fiscal year mean the year ended on the Saturday closest to
January 31. The periods that will end or have ended on
February 2, 2008, February 3, 2007, January 28,
2006, January 29, 2005, January 31, 2004, and
February 1, 2003, are referred to herein as 2007, 2006,
2005, 2004, 2003, and 2002, respectively. The results of
operations for fiscal year 2006 consisted of 53 weeks. All
other fiscal years referenced consist of 52 weeks.

Item 1.

Business

Disclosure
Regarding Forward-Looking Statements

The information presented in this
Form 10-K
under the headings Item 1. Business and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Such forward-looking
statements are based on the beliefs of our management as well as
on assumptions made by and information currently available to us
at the time such statements were made and relate to, among other
things, future comparable store sales results, business
strategies, changes to merchandise mix, future sales results,
expected demand for our products, financing requirements,
capital expenditures, store operations, store openings and
closings, and competition. Although we believe these statements
are reasonable, readers of this
Form 10-K
should be aware that actual results could differ materially from
those projected by such forward-looking statements as a result
of a number of factors, many of which are outside of our
control, including those set forth under Item 1A.
Risk Factors, beginning on page 11 of this
Form 10-K.
Readers of this
Form 10-K
should consider carefully the factors listed under Item 1A.
Risk Factors, as well as the other information and
data contained in this
Form 10-K.
All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth under Item 1A.
Risk Factors in this section. The words
anticipate, believe,
estimate, expect, intend,
plan, target, may,
will, project, should,
continue, and similar expressions or the negative
thereof, as they relate to us, are intended to identify such
forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.

Overview

We are the leading specialty retailer of quality leather
outerwear, accessories and apparel in the United States. Our
multi-channel store locations are designed to target a broad
customer base with a superior level of customer service. Through
our international leather sourcing network and in-house design
capabilities, we are able to consistently provide our customers
with quality, fashionable merchandise at attractive prices. Our
business structure results in shorter lead times, allowing us to
react quickly to popular and emerging fashion trends and
customer preferences, rapidly replenish fast-selling merchandise
and minimize fashion risk.

As of February 3, 2007, we operated a total of 417 stores
located in 45 states, including 287 mall stores,
116 outlet stores and 14 airport locations. We have
historically supplemented our permanent stores with temporary
seasonal stores during our peak selling season. However,
operation of our temporary seasonal stores was suspended in
2006. In 2005 and 2004, we operated 118 and 102 temporary
seasonal stores, respectively. We do not intend to operate any
temporary seasonal stores in the foreseeable future, but may
reconsider in the future. Our mall stores average approximately
2,550 total leased square feet and feature a large assortment of
classic and contemporary leather outerwear, accessories and
apparel. Our outlet stores operate primarily under the Wilsons
Leather
Outletsm
name, average approximately 3,950 total leased square feet and
offer a combination of clearance merchandise from our mall
stores, special outlet-only merchandise and key in-season goods.
Our airport stores average approximately 650 total leased square
feet, feature travel-related products as well as leather
accessories and provide us the opportunity to showcase our
products and the Wilsons Leather brand to millions of
potential customers each year in some of the busiest airports in
the United States.

Our main focus in 2006 was on creating a new model that would
lead to consistent top-line performance while maintaining
merchandise margins, cash position, the health of our balance
sheet, and a rational store count.

This strategy included four key initiatives:

Reengineer the Mall Stores. Throughout 2006,
we aggressively pursued our strategic initiative related to the
reengineering of our mall stores. This included transitioning
our merchandise to a newer, fresher and less outerwear dependent
product mix. During the first half and into the third quarter of
2006, receipts of new merchandise were limited to focus on
repositioning our inventory and eliminating non-go-forward and
overstocked inventory, including styles carried over from prior
years. We reduced the number of styles we offer in many of our
outerwear and apparel categories while increasing our accessory
penetration by offering a greater assortment of higher quality,
higher fashion handbags in a wider range of price points.
Overall, our product mix migrated to a mix with higher price
points.

The reengineering of our mall stores also included a significant
investment in new fixtures, including new window fixtures,
custom wall graphics, display tables, boutique wall
presentations, and new interior signage. Product presentation,
pricing strategies and store
set-ups were
also updated giving our mall stores a fresh and clean look that
is much easier to shop. These changes were all made with the
goal of transitioning our customer base toward a more
value-oriented, fashion-focused customer and away from the
price-driven promotional customer we have historically sold to.
The transformation of our mall stores was substantially
completed in the third quarter of 2006 in advance of the holiday
selling season.

In addition to this transformation of our mall stores, we began
the process of repositioning the Wilsons Leather brand.
We believe every company has its own personality. The
personality of Wilsons Leather is driven by the nature of our
product. Leather is associated with inherent attributes that
give it a mystique, a personality affecting essence unique among
apparel materials. It is genuine, adventurous, confident,
distinctive, indulgent, smart, primal, and cool. These are the
attributes of the Wilsons Leather brand. To reinforce
this belief, in the fall of 2006, we introduced our new logo and
Wilsons Leather Brand Mission:

At Wilsons Leather, we celebrate the beauty and quality of
leather. Our branded apparel and accessories highlight the
essence of leather  its feel, its value, its fashion.
Our stores invite each customer to see and touch every product,
connecting to their own sense of personal style. Our in-store
brand representatives promote our legacy and core competence, as
they teach Leather Intelligence to the men and women shopping in
our stores.

This new logo and brand mission were incorporated into our
stores new design and layout, our apparel and accessory
merchandise, as well as our associates training.

Revitalize the Outlet Division. We implemented
new marketing packages within our outlet division differentiated
from our mall stores. We also improved merchandising within the
outlet stores, including more opportunistic purchases from
third-party vendors, as well as our traditional suppliers.

Planning the Launch of a New Store Concept. We
planned to develop a new accessory store concept that would
focus on
mid-to-higher-end
fashion accessory offerings with a limited assortment of
outerwear geared to serve a fashion savvy customer, with price
points significantly higher than in our Wilsons Leather stores.
We set a goal to launch these stores in 2007. However, due to
the significant effort involved in transforming our mall stores,
we did not pursue these plans in 2006 and do not anticipate
doing so in the near future.

Develop a Wholesale Business. In 2006, we laid
the foundation for a wholesale business to sell proprietary
licensed and branded leather products in geographies and product
categories outside our current markets and product mix. During
the year, we established relations with certain major retailers
and other wholesale customers and expanded our NASCAR licensing
rights to our wholesale channel. By virtue of our sourcing
expertise, we believe we are well positioned to sell an array of
leather products to other retailers and that our wholesale
channel, while in its early stages, has the potential to become
a meaningful contributor of sales and profit in the future.

From the outset, we believed the impact of our efforts related
to these strategies would not be realized until after 2006, as
these initiatives were part of a multi-year, multi-format
strategy intended to move Wilsons Leather into a stronger
position as a company and a more relevant brand for the future.
We anticipated that these changes to the physical layout of our
mall stores, our new product mix and new merchandise strategies
would take time to resonate with our new target customer.

We believed that the 2006 holiday selling season would provide
confirmation that these strategies, particularly the
transformation of our mall stores, were gaining traction with
our new target customer. However, we experienced a significant
decrease in holiday selling season traffic and the resulting
21.6% decrease in our fourth quarter comparable store sales was
evidence that the migration to our new target customer will take
additional time and our strategic course will need to be refined
to improve top-line performance.

In 2007, we plan to build on the reinvented Wilsons
Leather we worked to create in 2006 and increase recognition and
acceptance of the new Wilsons Leather brand. We intend to
continue to appeal to a more contemporary and upscale target
customer. We do not intend to revert to the promotional
price only environment of crowded stores and
unattractive presentations that was our past.

Our accessories penetration increased to 41.4% of net sales in
2006 and we will continue to increase our accessories profile as
we go forward by offering new collections of high quality, high
fashion handbags at a wide range of price points. However, we
are still dependent on our outerwear business to drive traffic
into our stores. While we focus on building the Wilsons
Leather brand, we will increase the number of nationally
recognized designer brands in our outerwear offerings to help
generate additional traffic. We believe that once customers
enter our stores they will be able to compare the high quality,
distinctive leathers, quality construction, and refined details
that are the Wilsons Leather brand. We expect that the
introduction of additional designer brands into our stores will
begin in the second quarter of 2007.

Merchandising
Strategy and Product Design

Our merchandising is now tailored to a more contemporary and
upscale customer base. In 2006, we introduced a new offering of
a broad selection of higher quality, higher fashion merchandise
at higher prices. We currently offer approximately 3,000 and
5,900 styles of leather merchandise throughout our mall and
outlet stores, respectively. The accessories consist primarily
of handbags, briefcases, computer cases, gloves, wallets,
planners, and belts. Our merchandising staff, including buyers
and designers, continually monitors emerging trends and changing
consumer preferences and utilizes information provided by our
customers to ensure that we maintain a consistent and
up-to-date
selection of products. To further minimize our inventory risk
and maximize our sales performance, our merchandising team
utilizes our flexible merchandise management information system
to test new merchandise in many of our stores before making
large commitments and purchase orders with our suppliers.

The elements of our merchandise strategy combine to create an
assortment of products that appeal to consumers from a broad
range of socio-economic, demographic and cultural profiles and
are designed to generate demand and increase comparable store
sales. We perform internal market research at least annually,
and we will continue to survey our current and potential
customers each year to update our customer demographics. We
believe that our strategy will continue to position us as the
leading specialty retailer of quality leather outerwear,
accessories and apparel and strengthen the position of the
Wilsons Leather brand. The principal elements of our
merchandise strategy include:

Increase the Merchandising of Accessories. In
2006, we updated the merchandising within our mall stores to
increase the profile of our accessories business with an added
emphasis on handbags. As a result, accessories penetration
increased to 41.4% from 38.3% of net sales the year before. We
plan to drive accessories growth by continuing to offer new and
fresh collections of handbags that will attract customers into
our stores on a more frequent basis. Our accessories business
has proven to be less seasonal and has grown into the largest
merchandise category of our business. We believe that further
increasing our accessories business will offer us an opportunity
to limit the risk inherent in our business and reduce our
seasonality. Therefore, we will continue to offer a greater
assortment of high quality, high fashion handbags in a wider
range of price points.

Grow Brand Recognition. We plan to build on
the reinvented Wilsons Leather we worked to create
in 2006, when we began the process of transforming Wilsons
Leather into a stronger brand by introducing our new logo
and brand mission. This new logo and brand mission were
incorporated into our stores new design and layout, our
apparel and accessory merchandise, as well as our
associates training. Our goal in 2007 will be to continue
to promote the recognition and acceptance of the Wilsons
Leather brand through a variety of in-store visual
presentations in our national network of mall and outlet stores,
through our
e-commerce
site and through targeted marketing campaigns. As the leading
specialty retailer of quality leather outerwear, accessories and
apparel, we will continue to expand the recognition of the
Wilsons Leather brand by focusing our merchandising
efforts on both classic and fashion-forward styles designed to
reach our target market.

Designer Label Outerwear. We plan to introduce
additional nationally recognized designer labels into our
outerwear offerings to draw more customers into our mall stores.
While accessories are the largest merchandise category of our
business, we are still heavily dependent on mens and
womens outerwear and apparel. While we build acceptance of
the Wilsons Leather brand with a more upscale customer
base, the addition of these familiar high-end names to our
outerwear and apparel assortment should lend credibility to our
products. We believe that these well-known labels will generate
additional traffic and allow more customers the opportunity to
favorably compare the high quality, distinctive leathers,
quality construction, and refined details that are the
Wilsons Leather brand. The introduction of additional
designer brands into our stores will begin in the second quarter
of 2007.

Optimize Merchandise Assortment. We
continually evaluate our merchandise assortment to optimize our
mix and price points. In 2006, we introduced a newer, fresher
and less outerwear dependent product mix of high quality, high
fashion merchandise at higher price points. In addition, we
utilize our outlet channel to more effectively clear mall
merchandise in order to keep our mall stores fresh and
up-to-date.
We will continue to offer high quality, high fashion products at
price points geared to our targeted customer base in 2007.

Target Core Customer Base. In 2007, we intend
to continue to appeal to a more classic and contemporary target
customer. In our stores, we target high potential, high-volume
customers ages 25 to 55, and we work to ensure that our
stores are assorted with the products they want. By delivering
fashion-right leather merchandise that fits the lifestyle needs
of our target customers at prices they find attractive we
believe we will improve our customer focus and build consumer
loyalty to the Wilsons Leather brand.

Capitalize on Worldwide Sourcing Network and In-House Design
Team. We believe that our integrated worldwide
sourcing and in-house design capabilities enable us to gain
numerous competitive advantages and benefit our stores. We have
established strong relationships with suppliers globally and our
design team works closely with our suppliers to ensure seamless
development of leather styles, colors and finishes. We have a
staff of approximately 47 professionals in China, Hong Kong,
India, and South Korea to ensure that our designs are
manufactured quickly with consistent quality standards. As new
market trends are identified, we make merchandise design
decisions to ensure that key features of fashion merchandise are
incorporated in future designs. Our staff of in-house designers
combines industry experience with the latest fashion trends to
produce product lines that are both classic and fashion-forward
while also considering anticipated retail prices and profit
margins of the merchandise, the availability of leather and raw
materials and the capabilities of the factories that will
manufacture the merchandise. These designs are created to ensure
a quality, theme and image consistent with the Wilsons
Leather brand. We believe that our control of design and
sourcing results in shorter lead times, reducing inventory
requirements and fashion risk and permitting in-season reorders.

Pursue Multiple Selling Channels. Our
distribution network of multiple store formats allows us to
specifically tailor our stores with a wide selection of
merchandise at multiple price points and to optimize raw
materials usage, inventory flow and sales across all channels.
We operate our stores in malls, outlet centers and airports. We
also sell through our
e-commerce
site. We believe the efforts we made in 2006 to reengineer our
mall stores created a better shopping environment for our more
contemporary and upscale target customer. Our outlet stores
enable us to effectively manage inventories, drive year-round
sales and extend the recognition of the Wilsons Leather
brand while building our customer base. In 2007, we will
continue to build a wholesale channel that offers licensed and
branded products and targets retailers who either do not compete
with us or who look for us to supply categories of merchandise
that we do not carry in our own stores. Through the creative use
of marketing and promotions, and our

continued efforts to achieve optimal leather merchandise
assortments in each of our selling channels, we believe we can
successfully reach our targeted retail and wholesale customer
bases.

The following table sets forth the percentages of net sales by
major merchandise category for 2006, 2005 and 2004:

Merchandise Category

2006

2005

2004

Accessories

41.4

%

38.3

%

35.6

%

Womens apparel

28.0

%

30.0

%

32.1

%

Mens apparel

30.6

%

31.7

%

32.3

%

Total

100.0

%

100.0

%

100.0

%

Sourcing
and Quality Assurance

We believe that our extensive knowledge of the worlds
leather markets is critical in mitigating price fluctuations in
the cost of raw leather during times of high volatility. While
we do not normally obtain possession of a significant level of
raw material, we assist tanneries and factories in partnering,
developing and sourcing raw material from all over the world,
ensuring broad access to the marketplace. However, from time to
time we purchase supplies of leather to take advantage of market
opportunities to ensure reserves of quality materials at
acceptable prices. Leather is primarily sourced in China, India,
Italy, South Korea, and South America. Our buying strategies,
coupled with our expertise in leather development, enable us to
purchase entire lots of leather and use varying grades of
leather in different products, providing us with significant
price advantages.

Our sourcing infrastructure and strong relationships with our
suppliers allow us to effectively control merchandise production
without owning manufacturing facilities. Our designers and
buyers work closely with our sourcing team to identify and
develop leather styles, colors and finishes. We have a staff of
approximately 47 professionals located in China, Hong Kong,
India, and South Korea who are primarily responsible for
overseeing the production and quality assurance process in
overseas factories and are supervised by the sourcing team at
our corporate headquarters. Their responsibilities include
inspecting leather at the tanneries, coordinating the production
capacity, matching product samples to our technical
specifications, and providing technical assistance and quality
assurance through inspection in the factories.

Our merchandising department works closely with our overseas
personnel to coordinate order fulfillment. We have consistently
maintained our merchandise production cycle at approximately
90 days. We believe this production cycle allows us to
better control our production needs and reorder faster-selling
merchandise during our peak selling season. We believe that this
strategy results in more effective and efficient inventory
management and gives us the ability to manage production as the
business climate changes.

We have developed strong and long-standing relationships with
our manufacturers and tanneries. In 2006, approximately 82.0% of
our leather garments and accessories were manufactured by
approximately 73 independently owned manufacturing facilities in
China, India and South Korea. Our relationships, coupled with
our significant purchasing power, enable us to achieve economies
of scale and ensure that we can consistently maintain our
quality and obtain sufficient manufacturing capacity when needed.

In 2006, we made significant gains in our quality processes and
overall product quality, which will continue into 2007, as we
plan to offer higher quality merchandise to our customers with
distinctive leathers, improved construction and more refined
details and trimmings.

Store
Formats and Locations

As of February 3, 2007, we operated 417 retail stores
located in 45 states, including 287 mall stores, 116 outlet
stores and 14 airport locations. While we have historically
supplemented our permanent stores with temporary seasonal stores
during our peak selling season, operation of our temporary
seasonal stores was suspended in 2006. In 2005 and 2004, we
operated 118 and 102 temporary seasonal stores, respectively.

In addition, our
e-commerce
site at www.wilsonsleather.com offers leather outerwear,
accessories and apparel, as well as company background and
financial information.

Store Locations as of February 3, 2007:

State

Mall

Outlet

Airport

Total

Alabama



1



1

Arkansas

1





1

Arizona

2

1



3

California

25

14

1

40

Colorado

6

3



9

Connecticut

7

1



8

Delaware

3

1



4

Florida

8

8

1

17

Georgia

8

5

3

16

Iowa

4

1



5

Idaho

1





1

Illinois

24

4

5

33

Indiana

8

2



10

Kansas

2

1



3

Kentucky

4





4

Louisiana



2



2

Massachusetts

9

2



11

Maryland

8

4



12

Maine

3

2



5

Michigan

16

3



19

Minnesota

13

3

1

17

Missouri

3

3



6

Mississippi



2



2

North Carolina

7

3



10

North Dakota

3





3

Nebraska

1





1

New Hampshire

4

2



6

New Jersey

7

3



10

New Mexico

2

1



3

Nevada

1

3



4

New York

18

5



23

Ohio

14

4



18

Oklahoma

3





3

Oregon

5

1



6

Pennsylvania

15

4

1

20

Rhode Island

1





1

South Carolina



5



5

South Dakota

2





2

Tennessee

6

4



10

Texas

12

7



19

Utah

1

1

1

3

Virginia

6

3

1

10

Washington

10

3



13

Wisconsin

13

4



17

West Virginia

1





1

GRAND TOTAL

287

116

14

417

Site Selection for Store Openings and
Closings. We use a detailed process to identify
favorable store locations in existing or new markets. Within
each targeted market, we identify potential sites for new and
replacement stores by evaluating market dynamics. Our site
selection criteria include:

Our cross-functional review committee approves proposed store
projects, including new sites and lease renewals. We
periodically evaluate our stores to assess the needs for
remodeling or the timing of possible closure based on economic
factors. We use our knowledge of market areas and rely upon the
familiarity of our name, the uniqueness of our product category
and our national reputation with landlords to enhance our
ability to obtain prime store locations and negotiate favorable
lease terms. Our real estate, store planning and executive
management teams analyze the performance and profitability of
our stores and markets to assess the potential for new and
replacement stores and to identify underperforming stores. In
2007, we plan to open approximately five stores and close
approximately nine stores (primarily related to natural lease
terminations).

The following chart highlights the number of stores, by format,
opened or closed in each of the last three years:

Mall

Outlet

Airport

Total

Store count as of January 31,
2004

334

107

19

460

Fiscal year ended
January 29, 2005

Stores opened

3

2



5

Stores closed

(26

)



(3

)

(29

)

End of year count

311

109

16

436

Fiscal year ended
January 28, 2006

Stores opened

4

3



7

Stores closed

(17

)

(2

)

(2

)

(21

)

End of year count

298

110

14

422

Fiscal year ended
February 3, 2007

Stores opened

3

6



9

Stores closed

(14

)





(14

)

End of year count

287

116

14

417

Mall Stores. As of February 3, 2007, we
operated 287 mall stores in 41 states. Our mall stores
showcase a full range of leather outerwear, accessories and
apparel primarily under our proprietary labels. These stores
average approximately 2,550 total leased square feet and are
located in all types of shopping malls, serving diverse
demographics. A typical mall store will carry a selection of
approximately 3,000 different styles of our merchandise.

We have historically supplemented our mall stores with temporary
seasonal stores during our peak selling season. We did not
operate any temporary seasonal stores in 2006. In 2005 and 2004,
we operated 116 and 99 temporary seasonal mall stores,
respectively. We do not intend to operate any temporary seasonal
mall stores in the foreseeable future, but may reconsider if
circumstances warrant.

Outlet Stores. Our 116 outlet stores are
located in 36 states and operate under the names Wilsons
Leather
Outletsm
and The Wallet
Works®.
To maintain brand image, we generally locate outlet stores in
larger outlet centers in areas away from our mall stores. Our
Wilsons Leather
Outletsm
stores offer clearance items and special
outlet-only
merchandise as well as certain key in-season products. Wilsons
Leather
Outletsm
stores average approximately 3,950 total leased square feet and
generally carry approximately 5,900 styles of merchandise. The
Wallet
Works®
stores average approximately 1,800 square feet and carry
mainly accessories. We did not operate any temporary seasonal
outlet stores in 2006. In 2005 and 2004, we operated two and
three temporary seasonal outlet stores, respectively. We do not
intend to operate any temporary seasonal outlet stores in the
foreseeable future, but may reconsider if circumstances warrant.

Airport Stores. Our 14 airport stores play a
key role in growing awareness of the Wilsons Leather
brand and showcasing our products to millions of travelers
who pass by our airport stores each year. These stores average
approximately 650 total leased square feet and carry
approximately 1,000 of our best-selling styles, primarily
accessories.

e-commerce. Our
e-commerce
site, www.wilsonsleather.com, offers an extension of our store
experience and is intended to increase brand awareness,
strengthen the relationship with our customers, make our
merchandise more accessible to our customers and facilitate
cross-marketing with our stores. We are also using
e-mail as a
means of reaching out to our customers. Our
e-commerce
site features key in-season merchandise as well as promotional
merchandise. In 2006, our on-line net sales grew 7.1% to
$6.7 million as compared to $6.3 million in 2005. We
plan to continue to invest prudently in the development and
maintenance of our on-line presence, with the Internet serving
as an additional shopping format for our customers, as well as a
vehicle for building brand awareness. The administration and
marketing of our
e-commerce
site is outsourced to a third party vendor who performs similar
services for other specialty retailers.

Store Operations. Our store operations are
organized by region. Our mall and airport stores are divided
into two regions, and our outlet stores comprise a third region,
with each region subdivided into districts. Each district
manager is responsible for anywhere from eight to 17 stores.
Individual stores are staffed by a manager, an assistant manager
and a complement of full- and part-time sales associates whose
numbers fluctuate based upon expected and actual sales. A
typical store manager has an average of over 4.5 years
experience with our company. Store managers are responsible for
hiring and associate training, sales and other operations
including visual display and inventory control. All other
aspects of store operations are administered centrally by our
corporate offices.

A core aspect of our corporate culture is to focus on employee
training and customer service. We emphasize sales associate
training to ensure each associate has knowledge of our
merchandise and our target customer. Our associates receive
ongoing training in the unique properties of leather, the
appropriate methods of care for the various leather finishes and
the product specifications and details of our merchandise. In
addition, we train associates to perform minor repairs in the
store for customers free of charge.

We regularly evaluate our customer service performance through
on-line customer satisfaction surveys, direct surveys of
customers who return merchandise and mall intercept surveys.
Issues relating to policy, procedure or merchandise are
frequently reviewed to improve service and quality.

Distribution

Merchandise for our stores is shipped directly from domestic
merchandise vendors or overseas manufacturers to our
distribution center located in Brooklyn Park, Minnesota or to a
third-party distribution facility in Kent, Washington. We are
party to a
15-year
operating lease, with a five-year option to extend, for our
289,000 square-foot distribution center in Brooklyn Park,
Minnesota that is equipped with automated garment-sorting
equipment, automated accessory packing equipment, and hand-held
radio frequency scanners for rapid bar code scanning and
enhanced merchandise control. Approximately 20% of the
merchandise received is immediately sent to our stores through
cross-docking via the Kent, Washington distribution center,
which allows for reduced logistics expense and improved speed to
market. Additional merchandise is stored in our Brooklyn Park,
Minnesota distribution center to replenish stores weekly with
key styles and to build inventory for the peak holiday selling
season. Through the integration of merchant and distribution
systems, we are able to frequently replenish goods to ensure
that our stores maintain an appropriate level of inventory.

Marketing
and Advertising

Our marketing strategy is to position Wilsons Leather as the
preferred retailer of quality leather products for our target
customer, capitalizing on our position as the leading specialty
retailer of leather outerwear, accessories and apparel in the
United States. In 2006, we began the process of transforming
Wilsons Leather into a brand, not just a store, by introducing
our new logo and brand mission, which have been incorporated
into our stores new design and layout, our apparel and
accessory merchandise, as well as our associates training.
In addition, the Wilsons Leather brand identity and
current fashion trends are communicated to customers through
compelling fashion photo imagery in our stores and storefronts.
Our airport stores showcase the Wilsons Leather brand to
millions of travelers annually in some of the busiest airports
in the United States. Our
e-commerce
site makes our merchandise more accessible to customers,
increases brand awareness and facilitates cross-marketing
efforts with our
brick-and-mortar
stores.

We market to specific lifestyles and offer outerwear,
accessories and apparel in styles ranging from classic to
contemporary. We target high potential, high-volume customers
between the ages of 25 and 55. In addition, we believe
cross-channel brand marketing is an important driver for our
future success. By leveraging our various selling
formats  malls, outlets, airports, and our
e-commerce
site  we intend to strengthen the Wilsons Leather
brand as the fashion leather leader in the marketplace.

In 2006, as part of the reengineering of our mall stores, we
introduced new wall graphics, signage, ticketing, and store
fixtures making our stores more contemporary and easier to shop.
These changes better emphasize the special nature of our product
offerings making them more inviting for our customers to touch
and experience. In addition, we created multiple buying
opportunities for our customers through a national magazine
advertising campaign that ran over the holiday selling season, a
bounce-back coupon campaign and our holiday Gift
Leather

gift card event, which resulted in a significant increase in
gift card sales and represents substantial retail sales upon
redemption.

We will evaluate several different forms of media promotion to
better reach our target customer in 2007, including additional
national magazine advertising, direct mailings, freestanding
newspaper inserts, and other means.

Licensing

Our sales of licensed products are an important component of our
business. We have teamed with some of NASCARs top drivers
for the license to produce a line of products including
mens and womens fashion leather jackets, handbags
and other accessories bearing the marks of these popular
drivers. These licensed products are currently sold through
Wilsons Leather stores nationwide, as well as our
e-commerce
site and our wholesale business. During 2006, we added the
ability to sell NASCAR and other licensed products through our
wholesale distribution channels. We broadened our selection of
licensed products through agreements with, among others, Disney
Consumer Products, a division of Disney Enterprises, Inc. Our
various license agreements have terms that expire from
December 31, 2007 to April 30, 2010.

Under these licensing agreements, we are generally required to
achieve a minimum level of net sales, pay specified royalties
and receive prior approval from the licensor as to all elements
of the licensed merchandise we are to offer. We are also limited
as to the selling channels we may use and are precluded from
competing with certain licensor channels. The licensor generally
maintains the right to terminate our license agreement if we
fail to satisfy the specified requirements. Certain of our
license agreements have provisions requiring minimum sales and
related royalty commitments be met. As such, our ability to
extend the terms of our current license agreements may be
dependent upon meeting minimum sales
and/or
royalty levels or complying with all other specified conditions
of the agreements. Other matters may also affect our ability to
renew existing licenses and there is no assurance that we will
be able to renew our current license agreements when they expire.

Licensed product net sales were $10.9 million,
$13.3 million and $9.4 million, in 2006, 2005 and
2004, respectively. In 2007, we will continue to explore new
licensing opportunities to expand our collection of licensed
merchandise and broaden the markets that we serve. We anticipate
that the sale of licensed products will be a significant
component of the wholesale business we will continue to develop
in 2007 and beyond.

Information
Systems

We continually assess and upgrade our information systems in an
effort to better support our stores operations and home
office administrative functions. Over the past several years, we
have made considerable investments in improving our information
systems and completing the replacement of major operating
platforms in the functional areas of merchandising, finance,
human resources, manufacturing, and store
point-of-sale
and back-office systems. Most recently, in 2006 we completed a
significant upgrade to our financial systems, replaced the core
components of our store
point-of-sale
systems hardware, installed traffic counters in certain stores
on a pilot basis, and implemented a data warehouse to provide
more timely and detailed information. These systems provide all
levels of our organization access to information, powerful
analytical tools to improve our understanding of sales and
operating trends and the flexibility needed to anticipate future
business needs. We believe that our current systems, along with
planned upgrades, are adequate to meet our operational plans
over the next several years.

Our
point-of-sale
and back-office systems have been designed to, among other
things, free store associates time so that they can focus
on serving our customers. Our
point-of-sale
system automates store operations and gives each store the
ability to view inventory at other store locations, access human
resource and inventory management documentation and enables
customer information collection. On a daily basis, we obtain
sales and inventory data from our stores, facilitating
merchandising decisions regarding the allocation of inventory,
pricing and inventory levels. Our connection to our overseas
product sourcing offices provides both field management and home
office personnel access to pertinent business information. The
continuous flow of information to and from our overseas
personnel permits us to better control inventory, plan
manufacturing capacity, regulate merchandise flow, and ensure
product consistency among manufacturers.

The retail leather outerwear, accessories and apparel industry
is both highly competitive and fragmented. We believe that the
principal bases upon which we compete are selection, style,
quality, price, value, store location, and service. We compete
with a broad range of other retailers, including specialty
retailers, department stores, mass merchandisers and
discounters, and other retailers of leather outerwear,
accessories and apparel. We have found that we have different
competitors during different times of the year. For example, our
competition with department stores increases during the holiday
gift giving season. Over the past few years, we have faced
increased competition from department stores, mass merchandisers
and discounters as they have significantly expanded into the
leather outerwear category at promotional price points. While
our prices are competitive and we believe our quality is
superior, we lack the marketing leverage these parties can bring
to bear during the fourth quarter when they promote leather
outerwear.

Trademarks

We conduct our business under various trade names, brand names,
trademarks, and service marks in the United States, including M.
Juliantm,
Maxima®,
Pelle
Studio®,
Wilsons The Leather
Expertstm,
Tannery
West®,
Georgetown Leather
Designtm,
The Wallet
Works®,
Wilsons
Leathertm,
Wilsons Leather
Outletsm,
Handcrafted by Wilsons The Leather
Expertstm,
and Vintage by Wilsons The Leather
Expertstm.

Employees

As of February 3, 2007, we had 3,461 associates working for
our company. Of these, 288 were corporate office and
distribution center associates, 3,126 were full-time, part-time
and seasonal associates in our stores and 47 were located in our
far east sourcing offices. In 2006, during our peak selling
season from October through January, we employed approximately
105 additional seasonal associates in our distribution center
and approximately 1,814 additional seasonal associates in our
stores. We consider our relationships with our associates to be
good. None of our associates are governed by collective
bargaining agreements.

Available
Information

Our Internet address is www.wilsonsleather.com. We make
available free of charge through our Internet Web site our
annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Exchange Act, as amended, as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission. Our Code of Business Ethics and Conduct and our
Board of Directors Committee charters are also available via our
Web site.

The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties also
may impair our business operations. If any of the following
risks actually occur, our business, financial condition and
results of operations would likely suffer.

Our ability to grow our existing business depends in part on our
ability to appropriately identify, develop and effectively
execute strategies and initiatives related to strengthening our
stores operations and increasing brand acceptance. Our
growth over the next several years depends on our ability to
successfully and effectively manage our existing business by
continuing to revitalize our mall and outlet stores, increase
acceptance of our brand and open new stores on a limited basis
as opportunities arise. Our ability to grow our business will be
limited, however, if we are unable to improve the sales
performance and productivity of our existing stores. Failure to
effectively identify, develop and execute strategies and
initiatives may lead to increased operating costs without
offsetting benefits and could have a material adverse effect on
our results of operations. During 2006, we reengineered our mall
stores with a goal of transitioning our customer base toward a
more fashion-focused and less price-sensitive customer. In
addition, we introduced the new Wilsons Leather logo and brand
mission to better promote the uniqueness of our merchandise.
Based on our experience over the 2006 holiday selling season, we
believe that it will take longer for our new product mix and
merchandise strategy to reach our new target customer than we
expected and it is possible that the new strategy may not be
successful at all. If we are not able to attract customers
through our new strategy and increase acceptance of the
Wilsons Leather brand, our comparable store sales,
operating margins and cash flow will be adversely affected,
which would likely have a material adverse effect on our
business, financial condition and results of operations.

Our
comparable store sales declined during four of the past five
years.

Our comparable store sales decreased by 17.2% in 2006, including
a 21.6% decrease in the fourth quarter. In 2005, our comparable
store sales decreased by 2.9%, with a 10.0% decrease in the
fourth quarter. Comparable store sales declined 6.8% and 7.0% in
2003 and 2002, respectively. Comparable store sales for 2004
increased nominally by 0.6%. Our comparable store sales are
affected by a variety of factors, including:



general economic conditions and, in particular, the retail sales
environment;



consumer shopping preferences;



transition of our target customer base;



acceptance of the Wilsons Leather brand;



actions by competitors or mall anchor tenants;



weather conditions;



fashion trends;



changes in our merchandise mix;



the timing of new store openings and the relative proportion of
new stores to mature stores;



maintaining appropriate inventory levels;



calendar shifts of seasonal periods; and



timing of promotional events.

A continued inability to generate comparable store sales
increases in the future would erode operating margins if we were
unable to implement additional cost reductions and could have a
material adverse effect on our business, financial condition and
results of operations.

We may
need funding in addition to our cash flow from operations and
existing credit facilities.

Based on our current 2007 plan, we believe that the borrowing
capacity under our senior credit facility, together with cash on
hand, current and anticipated cash flow from operations, and
cost reductions associated with our lower store count will be
adequate to meet our working capital and capital expenditure
requirements through the first half of 2008. However, if our
comparable store sales do not increase as planned in the second
half of 2007, we expect that we may need additional financing in
2008 in order to fund our working capital and capital
expenditure requirements. Even if our performance during 2007 is
on track with plan, we may also seek to obtain additional
financing during 2007 for 2008 working capital needs as well as
the ability to accelerate implementation of our merchandise and
brand acceptance strategies. We are currently exploring various
financing strategies. There can be no assurance that additional
financing would be possible or could be obtained on terms that
are favorable to us, or at all. If we are not able to obtain
such access to capital, we may not be able to implement our key
initiatives to grow our business. If we raise capital through
the issuance of additional equity securities, the holdings of
existing shareholders may be diluted.

We plan to introduce additional nationally recognized designer
labels into our outerwear offerings beginning in the second
quarter of 2007. We believe that in offering these designer
labels, we will generate additional traffic and allow more
customers the opportunity to favorably compare the high quality
of the Wilsons Leather brand to these well-known labels.
The successful implementation of this merchandising strategy
will depend on our relationship with our key supplier. Our
inability to successfully source and integrate additional
designer labels into our outerwear merchandise mix may limit
acceptance of the Wilsons Leather brand, which may have a
material adverse effect on our business, financial condition and
results of operations.

Changes
in customer shopping patterns could harm our
sales.

Most of our stores are located in enclosed shopping malls and
regional outlet centers. Our ability to sustain or increase the
level of sales depends in part on the continued popularity of
malls and outlet centers as shopping destinations and the
ability of malls and outlet centers, tenants and other
attractions to generate a high volume of customer traffic. Many
factors beyond our control may decrease mall traffic, including,
among other things, economic downturns, rising energy prices,
the closing of anchor department stores, weather, concerns of
terrorist attacks, construction and accessibility to strip
malls, or alternative shopping formats (such as catalogs,
e-commerce
or discount stores). Any changes in consumer preferences and
shopping patterns could adversely affect our financial condition
and operating results.

We may
not be able to build and grow our wholesale business effectively
and timely and we cannot assure that our wholesale business will
warrant additional growth or gain market
acceptance.

In 2006, we laid the foundation for a wholesale business to sell
proprietary licensed and branded leather products in geographies
and product categories outside our current markets and product
mix. During the year, we established relations with certain
major retailers and other wholesale customers and expanded our
NASCAR licensing rights to our wholesale channel. However, our
wholesale business is unproven and still in the early stages of
development. Competitive circumstances and consumer
characteristics in new markets served by our wholesale business
may differ substantially from those in the markets in which we
have substantial experience. While we believe that our wholesale
business may have the potential for expansion, there can be no
assurance that we will expand our wholesale business to a
meaningful contributor of sales and profit in the future.

We may
need to record additional impairment losses in the future if our
stores operating performance does not
improve.

We continually review our stores operating performance and
evaluate the carrying value of their assets in relation to their
expected future cash flows. In those cases where circumstances
indicate that the carrying value of the applicable assets may
not be recoverable, we record an impairment loss related to the
long-lived assets. In the

fourth quarter of 2006, we recorded an impairment loss of
$0.7 million related to certain mall stores assets.
If our stores operating performance does not improve in
the future, the carrying value of our stores assets may
not be recoverable in light of future expected cash flows. This
may result in our need to record additional impairment losses in
certain markets where our stores operate that could have a
materially adverse effect on our business, financial condition
and results of operation.

The
high level of competition in our markets may lead to reduced
sales and profits.

The retail leather outerwear, accessories and apparel markets
are highly competitive and fragmented. We compete with a broad
range of other retailers, including other specialty retailers,
department stores, mass merchandisers and discounters, many of
which have greater financial and other resources. Increased
competition may reduce sales, increase operating expenses,
decrease profit margins, and negatively affect our ability to
obtain site locations, sales associates and other employees.
During 2003 through 2006, we faced increased competition from
department stores, mass merchandisers and discounters as they
have significantly expanded into the leather outerwear category
at promotional price points. There can be no assurance that we
will be able to compete successfully in the future and, if we
are unable to do so, our business, financial condition and
operating results could be adversely affected.

Uncertainty
in general economic conditions may lead to reduced consumer
demand for our leather outerwear, accessories and apparel and
could adversely affect our business and liquidity.

continued hostilities in the Middle East and other significant
national and international events; and



taxation and consumer confidence in future economic conditions.

Consumer purchases of discretionary items, such as our products,
tend to decline during recessionary periods when disposable
income is lower. Any uncertainties in the United States
economic outlook can adversely affect consumer spending habits
and mall traffic and result in lower than expected net sales on
a quarterly and annual basis.

Increased energy prices put additional pressure on consumer
purchases of discretionary items, which could adversely affect
our net sales. In addition, these higher energy costs may have
the potential to increase our shipping and delivery costs and
could adversely affect our merchandise margins if we are unable
to pass these costs on to our customers.

Unseasonably
warm weather, particularly during the fall and winter, has in
the past and may in the future negatively effect our sales
performance.

Unseasonably warm weather during the fall and winter season has
negatively impacted our comparable store sales and total net
sales performance over the past two years. Continued warm
weather trends in the future may have a material adverse effect
on our business, financial condition and results of operations.

Our success depends on our ability to identify fashion and
product trends as well as our ability to anticipate, gauge and
react swiftly to changes in consumer demand. Our products must
remain appealing for a broad range of consumers with diverse and
changing preferences; however, our orders for products must be
placed in advance of

customer purchases. We cannot be certain that we will be able to
identify new fashion trends and adjust our product mix in a
timely manner. If we misjudge market preferences, we may be
faced with significant excess inventories for some products and
missed opportunities for other products. In response, we may be
forced to rely on additional markdowns or promotional sales to
dispose of excess, slow-moving inventories. In addition,
consumer sentiment toward and demand for leather may change and
we may not be able to react to any such changes effectively, or
at all. There can be no assurance that demand for our leather
products will not decline as a result of negative publicity
regarding certain diseases that may affect the supply of hides
used to make leather products such as mad cow and
hoof-and-mouth
disease. If we are unable to anticipate, gauge and respond to
changes in demand or if we misjudge fashion trends, it could
have a material adverse effect on our business, financial
condition and results of operations.

A
decrease in the availability of leather or an increase in its
price could harm our business.

The purchase of leather comprised approximately 51.3%, 55.2% and
56.1% of our costs of goods sold for leather apparel and 52.5%,
47.8% and 47.6% of the costs of goods sold for accessories in
2006, 2005 and 2004, respectively. A number of factors affect
the price of leather, including the demand for leather in the
shoe, furniture and automobile upholstery industries. In
addition, leather supply is influenced by worldwide meat
consumption and the availability of hides. Fluctuations in
leather supply and pricing, which can be significant, may have a
material adverse effect on our business, financial condition and
results of operations.

We
could have difficulty obtaining merchandise from our foreign
suppliers.

We import our leather garments and accessories from independent
foreign contract manufacturers located primarily in China and
India. We do not have long-term contracts or formal supply
arrangements with our contract manufacturers. In 2006,
approximately 82.0% of our leather garments and accessories
contracted for manufacture were purchased from foreign
suppliers, with approximately 64.0% purchased from China and
12.0% purchased from India. Trade relations with China and India
have, in the past, been contentious. If trade relations with
these countries or any other country from which we source goods
deteriorate, or if any new or additional duties, quotas or taxes
are imposed on imports from these countries, leather purchase
and production costs could increase significantly, negatively
impacting our sales prices, profitability or the demand for
leather merchandise. Further, we cannot predict whether any of
the countries in which our products are currently manufactured
or may be manufactured in the future will be subject to trade
restrictions imposed by the United States government, including
the likelihood, type or effect of any such restrictions, or
whether any other conditions having an adverse effect on our
ability to source products will occur. In addition, it will take
time for us to transition our sourcing to other countries.
Certain other risks related to foreign sourcing include:



transportation delays and interruptions, including delays
relating to labor disputes;



economic and political instability;



restrictive actions by foreign governments;



trade and foreign tax laws;



fluctuations in currency exchange rates and restrictions on the
transfer of funds; and



the possibility of boycotts or other actions prompted by
domestic concerns regarding foreign labor practices or other
conditions beyond our control.

Any event causing a sudden disruption of imports from China,
India or other foreign countries, including a disruption due to
financial difficulties of a supplier or a catastrophic event
(such as, but not limited to, a fire, tornado, flood, or act of
terrorism) could have a material adverse effect on our business,
financial condition and results of operations. In the event that
commercial transportation is curtailed or substantially delayed
due to a dockworkers strike or other similar work action,
our business may be adversely impacted, as we may have
difficulty shipping merchandise to our distribution centers and
stores.

Since our leather outerwear and apparel products are most often
purchased during the holiday season, we experience substantial
fluctuations in our sales and profitability. We generate a
significant portion of our net sales from October through
January, which includes the holiday selling season. We generated
49.2% of our annual net sales during that time period in 2006,
and 23.6% in December alone. Because our profitability, if any,
is historically derived in the fourth quarter, our annual
results of operations have been, and will continue to be,
heavily dependent on the results of operations from October
through January.

Given the seasonality of our business, misjudgments in fashion
trends, the effects of war and other significant national and
international events or unseasonably warm or severe weather
during our peak selling season could have a material adverse
effect on our financial condition and results of operations. Our
results of operations may also fluctuate significantly as a
result of a variety of other factors, including:



merchandise mix offered during the peak selling season;



the timing and level of markdowns and promotions by us during
the peak selling season;



the timing and level of markdowns and promotions by our
competitors during the peak selling season;



consumer shopping patterns and preferences;



the timing of certain holidays; and



the number of shopping days and weekends between Thanksgiving
and Christmas.

Our sales from licensing agreements are an important component
of our business. Net sales of licensed products were
$10.9 million, $13.3 million and $9.4 million in
2006, 2005 and 2004, respectively. Under these licensing
agreements we are generally required to achieve a minimum level
of net sales, pay specified royalties and receive prior approval
from the licensor as to all elements of the licensed merchandise
we are to offer. We are also limited as to the selling channels
we may use and are precluded from competing with certain
licensor channels. The licensor generally maintains the right to
terminate our license agreement if we fail to satisfy the
specified requirements. Certain of our license agreements have
provisions requiring us to meet minimum sales and related
royalty commitments. There can be no assurance that we will be
able to accomplish the following, any of which could have an
adverse effect on our business, financial condition and results
of operations:

obtain the ability to sell through additional selling channels,
including wholesale; and



enter into new licensing agreements with other parties.

The
public sale of our common stock issued pursuant to our employee
benefit plans or the sale into the market of the shares issued
in our equity financing in April 2004 or issuable upon exercise
of the warrants delivered in connection with our April 2004
equity financing could decrease the price of our common stock or
make it more difficult to obtain additional financing in the
future.

As of February 3, 2007, 1,122,283 shares were subject
to issuance upon the exercise of vested stock options previously
granted by us, all of which would be freely tradable if issued,
subject to compliance with Rule 144 in the case of our
affiliates. In addition, 1,636,921 shares of our common
stock have been reserved for issuance pursuant to our employee
benefit plans. In connection with the April 25, 2004 equity
financing which was completed on July 2, 2004, we issued
17,948,718 shares of our common stock and warrants to
purchase four million shares of our common stock, subject to
certain adjustments, to three institutional investors. The
market price of our common stock could decline as a result of
market sales of such shares of common stock or the perception
that such sales will

occur. Such sales or the perception that such sales might occur
also might make it difficult for us to sell equity securities in
the future at a time and at a price that we deem appropriate.

Our
accounting policies and methods are key to how we report our
financial condition and results of operations and they may
require management to make estimates about matters that are
inherently uncertain.

Our management must select and apply many of these accounting
policies and methods so that they not only comply with
U.S. generally accepted accounting principles, but they
also reflect managements judgment as to the most
appropriate manner in which to record and report our financial
condition and results of operations. In some cases, management
must select the accounting policy or method to apply from two or
more alternatives, any of which might be reasonable under the
circumstances, yet might result in our reporting materially
different amounts than would have been reported under a
different alternative. Note 1, Summary of significant
accounting policies, to our consolidated financial
statements describes our significant accounting policies.

We have identified two accounting policies as being
critical to the presentation of our financial
condition and results of operations because they require
management to make particularly subjective
and/or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. These critical accounting policies relate to the
valuation of inventory and the valuation of property and
equipment for impairment. Because of the uncertainty of
estimates about these matters, we cannot provide any assurance
that we will not:



significantly increase our lower of cost or market allowance for
obsolete inventory; or



recognize a significant provision for impairment of our fixed
assets at our stores.

For more information, refer to Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical
Accounting Policies.

Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.

We prepare our financial statements to conform with
U.S. generally accepted accounting principles. These
accounting principles are subject to interpretation by the
American Institute of Certified Public Accountants, the
Securities and Exchange Commission and various bodies formed to
interpret and create appropriate accounting principles. A change
in those principles could have a significant effect on our
reported results and may affect our reporting of transactions
completed before a change is announced. Changes to those rules
or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.

Loss
of key members of our senior management team could adversely
affect our business.

Our success depends largely on the efforts and abilities of our
current senior management team. The loss of service of any of
these persons could adversely affect our business. We do not
maintain key-man life insurance on any members of our senior
management team.

Ownership
of our common stock is concentrated.

R. Ted Weschler, one of our directors, is the sole managing
member of the investment manager of Peninsula Investment
Partners, L.P. (Peninsula). Peninsula beneficially
owned, in the aggregate, 43.6% of our common stock as of
March 23, 2007. Peninsula voting alone would be able to
exert significant influence over our business and affairs,
including:



the election of individuals to our board of directors;



the adoption of amendments to our Amended and Restated Articles
of Incorporation; and



the approval of certain mergers, additional financing, sales of
assets, and other business acquisitions or dispositions.

changes in market valuations of other companies in the same or
similar markets.

In addition, the Nasdaq Global
Marketsm
has experienced extreme volatility that has often been unrelated
to the performance of particular companies. Future market
fluctuations may cause our stock price to fall regardless of our
performance. Such volatility may limit our future ability to
raise additional capital.

We
rely on third parties for upgrading and maintaining our
information systems.

The efficient operation of our business is heavily dependent on
our information systems. In particular, we rely heavily on the
automated sortation system used in our Brooklyn Park, Minnesota
distribution center and the merchandise management system used
to track sales and inventory. We also rely on a third-party
package for our accounting, financial reporting and human
resource functions. We depend on our vendors to maintain and
periodically upgrade these systems so that these systems
continue to support our business. The software programs
supporting our automated sorting equipment and processing our
inventory management information are licensed to us by
independent software developers. The inability of these
developers to continue to maintain and upgrade these software
programs would disrupt our operations if we were unable to
convert to alternate systems in an efficient and timely manner.

War,
acts of terrorism or the threat of either may negatively impact
the availability of merchandise and otherwise adversely impact
our business.

In the event of war or acts of terrorism, or if either is
threatened, our ability to obtain merchandise available for sale
in our stores may be negatively affected. We import a
substantial portion of our merchandise from other countries. If
imported goods become difficult or impossible to bring into the
United States, and if we cannot obtain such merchandise from
other sources at similar costs, our sales and profit margins may
be adversely affected.

The majority of our stores are located in enclosed shopping
malls and regional outlet centers. In response to the terrorist
attacks of September 11, 2001, security has been heightened
in public areas. Any further threat of terrorist attacks or
actual terrorist events, particularly in public areas, could
lead to lower customer traffic in shopping malls and outlet
centers. In addition, local authorities or mall management could
close shopping malls and outlet centers in response to any
immediate security concern. Mall closures, as well as lower
customer traffic due to security concerns, could result in
decreased sales that would have a material adverse effect on our
business, financial condition and results of operations.

Any
significant interruption in the operation of our corporate
offices and distribution centers could have a material adverse
effect on our business.

Our corporate offices and our Brooklyn Park, Minnesota
distribution center are in one location. Our operations could be
materially and adversely affected if a catastrophic event (such
as, but not limited to a, fire, tornado, flood, or act of
terrorism) impacts the use of these facilities. Similarly, any
such catastrophic event impacting our third-party distribution
center in Kent, Washington could also have a material adverse
affect on our operations. There can

be no assurance that we would be successful in obtaining
alternative facilities in a timely manner if such a catastrophic
event were to occur.

Item 1B.

Unresolved
Staff Comments

None.

Item 2.

Properties

As of February 3, 2007, we operated 417 leased store
locations. All of our stores were located in shopping malls,
outlet centers or airport retail locations. New store leases
with third parties are typically 10 years in duration. Most
leases require us to pay annual minimum rent plus a contingent
rent dependent on the stores annual sales in excess of a
specified threshold. In addition, the leases generally require
us to pay costs such as real estate taxes and common area
maintenance costs.

We are also party to a
15-year
operating lease, with a five-year option to extend, for a
289,000 square-foot distribution center and
69,000 square-foot corporate office space located in
Brooklyn Park, Minnesota.

Item 3.

Legal
Proceedings

We are involved in various legal actions arising in the ordinary
course of business. In the opinion of our management, the
ultimate disposition of these matters will not have a material
adverse effect on our consolidated financial position and
results of operations.

Item 4.

Submission
of Matters to a Vote of Security Holders

None.

Item 4A.

Executive
Officers of the Registrant

The following table sets forth certain information concerning
our executive officers as of March 23, 2007:

Name

Age

Position

Michael M. Searles

57

Chairman and Chief Executive
Officer

Stacy A. Kruse

47

Chief Financial Officer and
Treasurer

M. Adam Boucher

45

Vice President, Store Sales and
Real Estate

William S. Hutchison

33

Chief Merchandising and Sourcing
Officer

Jeffrey M. Loeb

51

Chief Information Officer

Michael J. Tripp

38

Vice President, Global Logistics
and Customs Compliance

Michael M. Searles has served as our Chief Executive
Officer since December 2004 and as Chairman and Chief Executive
Officer since February 2005. Prior to joining Wilsons Leather,
Mr. Searles had been in private retail consulting from 2002
to November 2004. He served as Chairman of the Board and Chief
Executive Officer of Factory 2-U Stores, Inc., an off-price
apparel and home products retailer, from 1998 to 2002. Factory
2-U Stores, Inc. filed for Chapter 11 bankruptcy in January
2004. Mr. Searles served in various positions at Montgomery
Ward, a full-line department store chain, from 1996 to 1997,
most recently as President, Merchandising and Marketing.
Mr. Searles was President of Womens Specialty Retail
Group (formerly, the Casual Corner Group), then a division of
United States Shoe Corporation, a manufacturing and retail
apparel and footwear company, from 1993 to 1995.
Mr. Searles also served as President of Kids R
Us, a leading retailer of toys, baby products and
childrens apparel from 1984 to 1993.

Stacy A. Kruse has served as our Chief Financial Officer
and Treasurer since January 2006, prior to which she served as
our Vice President Finance and Treasurer from August 2004 to
January 2006, our Director of Finance and Treasurer from April
2003 to August 2004, and Director of Business
Planning & Analysis and Treasurer from June 2001 to
March 2003. Prior to joining Wilsons Leather, Ms. Kruse was
Director of Finance (Information Services and Business
Operations) at US Bancorp, a financial services company,
from 1999 to 2001 and held various

positions at Carlson Marketing Group, a marketing services
company, from 1995 to 1999, most recently as Director of
Operations (Loyalty Division) from 1996 to 1999.

M. Adam Boucher has served as our Vice President,
Store Sales and Real Estate since January 2006, prior to which
he served as our Vice President, Store Sales from August 2005 to
December 2005. Prior to joining Wilsons Leather,
Mr. Boucher held various retail stores and corporate
development positions at Payless ShoeSource, a specialty family
footwear retailer, from 1988 to 2005, most recently as Vice
President, Retail Operations Eastern Zone from 2004 to 2005.

William S. Hutchison has served as our Chief
Merchandising and Sourcing Officer since March 2007, prior to
which he served as our Vice President, Sourcing and Wholesale
from January 2006 to February 2007, our Vice President, Sourcing
from September 2005 to January 2006 and our Divisional
Merchandise Manager  Mens from February 2001 to
September 2005. Prior to joining Wilsons Leather,
Mr. Hutchison held various merchandising positions with
Dillards Department Stores, Inc. from 1995 to 2001, most
recently as Product Development, Brand Manager from 1999 to 2001.

Jeffrey M. Loeb joined our company as Chief Information
Officer on March 27, 2007. Prior to becoming an executive
officer of Wilsons Leather, Mr. Loeb served as an
information technology consultant since November 2004, and in
that capacity he provided consulting services to Wilsons Leather
from June 2006 to March 2007. Mr. Loeb previously served in
various information technology positions at Best Buy, a consumer
electronics retailer, including most recently as a Program
Director, from 2000 to November 2004.

Michael J. Tripp has served as our Vice President, Global
Logistics and Customs Compliance since February 2007, prior to
which he served as our Vice President, Logistics from June 2006
to February 2007, our Director of Distribution and
Transportation from April 2004 to June 2006, and our General
Manager Distribution from February 2001 to April 2004. Prior to
joining Wilsons Leather, Mr. Tripp held various
distribution center leadership positions with Kmart, a mass
merchandise retailer, from 1997 to February 2000, most recently
as Assistant General Manager from 1999 to 2000 and as an
Operations Supervisor with Target, an upscale discounter, from
1995 to 1997.

Our common stock, $.01 par value, trades on the Nasdaq
Global MarketSM under the symbol WLSN. The closing price of our
common stock on March 23, 2007 was $1.68. The following
table presents the high and low market prices from
January 30, 2005 through February 3, 2007.

Quarterly Common Stock Price Ranges

Fiscal quarter ended

High

Low

April 30, 2005

$

5.60

$

2.62

July 30, 2005

$

7.20

$

4.80

October 29, 2005

$

7.26

$

4.97

January 28, 2006

$

5.03

$

3.04

April 29, 2006

$

3.98

$

3.14

July 29, 2006

$

4.12

$

3.25

October 28, 2006

$

3.70

$

2.46

February 3, 2007

$

2.84

$

1.68

There were 70 record holders of our common stock as of
March 23, 2007.

The comparative stock performance graph below compares the
cumulative shareholder return on our common stock for the period
from February 2, 2002 through February 3, 2007, with
the cumulative total return on (i) the Nasdaq Retail
Composite Stock Index and (ii) the S&P 500 Index. The
table assumes the investment of $100 in our common stock, the
Nasdaq Retail Composite Stock Index and the S&P 500 Index on
February 2, 2002, and the reinvestment of all dividends
through the last trading day of the years ended February 1,
2003, January 31, 2004, January 29, 2005,
January 28, 2006, and February 3, 2007.

2/2/02

2/1/03

1/31/04

1/29/05

1/28/06

2/3/07

Wilsons The Leather Experts
Inc.

100.00

38.16

25.60

26.02

28.35

16.29

Nasdaq Retail Composite
Stock Index

100.00

81.32

119.23

142.79

154.85

170.14

S&P 500 Index

100.00

76.25

100.80

104.38

114.39

129.07

Dividends

We have not declared any cash dividends since our inception in
May 1996. In addition, our loan agreements contain certain
restrictions limiting, among other things, our ability to pay
cash dividends or make other distributions. See Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and
Capital Resources.

Purchases
of Equity Securities

We did not purchase any shares of our common stock during the
fourth quarter of 2006.

The selected historical consolidated financial data set forth
below should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our Consolidated
Financial Statements, beginning on
page F-1
of this report. The selected historical consolidated financial
data has been derived from our audited consolidated financial
statements.

SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

(In
thousands, except per share amounts and operating
data)

For the years
ended(1)

February 3,

January 28,

January 29,

January 31,

February 1,

2007

2006

2005

2004

2003

Statement of Operations
Data:

Net sales

$

321,262

$

397,986

$

441,071

$

521,025

$

571,547

Gross margin

87,011

139,232

141,358

147,111

169,753

Operating income (loss)

(35,610

)

12,282

(18,512

)

(25,920

)

(13,603

)

Income (loss) from continuing
operations before income taxes and cumulative effect of a change
in accounting principle

(37,472

)

9,126

(25,939

)

(36,788

)

(23,856

)

Income tax benefit

(4,377

)

(3,086

)

(2,183

)

(3,205

)

(9,543

)

Income (loss) from continuing
operations before cumulative effect of a change in accounting
principle

(33,095

)

12,212

(23,756

)

(33,583

)

(14,313

)

Income (loss) from discontinued
operations, net of tax





173



(42,014

)

Cumulative effect of a change in
accounting principle, net of
tax(2)









(24,567

)

Net income (loss)

$

(33,095

)

$

12,212

$

(23,583

)

$

(33,583

)

$

(80,894

)

Basic income (loss) per
share:

Income (loss) from continuing
operations before cumulative effect of a change in accounting
principle

$

(0.85

)

$

0.31

$

(0.76

)

$

(1.64

)

$

(0.71

)

Income (loss) from discontinued
operations





0.01



(2.10

)

Cumulative effect of a change in
accounting principle









(1.22

)

Basic income (loss) per share

$

(0.85

)

$

0.31

$

(0.75

)

$

(1.64

)

$

(4.03

)

Diluted income (loss) per
share:

Income (loss) from continuing
operations before cumulative effect of a change in accounting
principle

The year ended February 3, 2007 is a 53 week year, all
other years presented are 52 week years.

(2)

Includes a charge to operations, net of tax, of
$24.6 million resulting from the cumulative effect of
adopting SFAS No. 142, Goodwill and Other
Intangible Assets.

(3)

The figures for January 31, 2004 exclude the 111
liquidation stores.

(4)

A store is included in the comparable store sales calculation
after it has been opened and operated by us for more than
52 weeks. The percentage change is computed by comparing
total net sales for comparable stores as thus defined at the end
of the applicable reporting period with total net sales from
comparable stores for the comparable period in the prior year.

Item 7.

Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion of our financial condition and results
of operations should be read in conjunction with our selected
historical consolidated financial data and consolidated
financial statements and notes thereto appearing elsewhere in
this
Form 10-K.

Executive
Overview

We measure performance using such key operating statistics as
comparable store sales, sales per square foot, gross margin
percentage, and store operating expenses, with a focus on labor,
as a percentage of sales. These results translate into store
operating contribution and store cash flow, which we use to
evaluate overall performance on an individual store basis. Store
operating contribution is calculated by deducting a stores
operating expenses from its gross margin and is measured as a
percentage of sales. Store operating contribution gives us an
overall measure as to whether or not individual locations and
markets are meeting our financial objectives.

In addition, general and administrative expenses are monitored
in absolute amount, as well as on a percentage of net sales
basis. We continue to monitor product costing and promotional
activity, which allows us to generally maintain acceptable
margin levels. In 2006, our inventory markdowns were higher than
in the past as we aggressively liquidated certain merchandise
and repositioned our inventory mix pursuant to our strategic
initiative of reengineering our mall stores. Our gross margins
are influenced by the mix of merchandise between outerwear and
accessories in our total sales.

We also measure and evaluate investments in our retail
locations, including inventory and property and equipment.
Inventory performance is primarily measured by inventory turns,
or the number of times store inventory turns over in a given
period, and amounts of owned inventory at various times based on
payment terms from our vendors. The most significant investments
in property and equipment are made at the time we open a store.

As of February 3, 2007, we operated a total of 417 stores
located in 45 states, including 287 mall stores, 116 outlet
stores and 14 airport locations. We have historically
supplemented our permanent stores with temporary seasonal stores
during our peak selling season. However, operation of our
temporary seasonal stores was suspended in 2006. In 2005 and
2004, we operated 118 and 102 temporary seasonal stores,
respectively. We do not intend to operate any temporary seasonal
stores in the foreseeable future, but may reconsider in the
future.

We generate a significant portion of our net sales from October
through January, which includes the holiday selling season. We
generated 49.2% of our annual net sales in that time period in
2006, and 23.6% in December

alone. As part of our strategy to improve operating margins and
maximize revenue and profitability during non-peak selling
seasons, we have increased the number of outlet locations since
2000, which are less seasonal, and modified our product mix to
emphasize accessories. In addition, our continued focus on
accessory penetration has resulted in accessory sales growth as
a percentage of our total net sales to 41.4% in 2006 from 38.3%
in 2005 and 35.6% in 2004.

Comparable store sales decreased 17.2% and 2.9% in 2006 and
2005, respectively, and increased 0.6% in 2004. A store is
included in the comparable store sales calculation after it has
been open and operated by us for more than 52 weeks. The
percentage change is computed by comparing total net sales for
comparable stores as thus defined at the end of the applicable
reporting period with total net sales from comparable stores for
the comparable period in the prior year. As a percentage of net
sales, continuing operations resulted in a net loss of 10.3% in
2006, net income of 3.1% in 2005, and a net loss of 5.4% in 2004.

The following table contains selected information for each of
our store formats for 2006.

Comparable

Sales per Selling

Sales

Store Sales

Average Size

Square
Foot(1)

(in millions)

(in selling

square feet)

Mall stores

$

173.1

(22.7

)%

2,000

$

296

Outlet stores

128.7

(8.9

)%

3,250

347

Airport stores

10.7

(12.7

)%

600

1,289

E-commerce

6.7







Wholesale

1.5







Seasonal

0.6







Total

$

321.3

The following table contains selected information for each of
our store formats for 2005.

Comparable

Sales per Selling

Sales

Store Sales

Average Size

Square
Foot(1)

(in millions)

(in selling

square feet)

Mall stores

$

225.8

(2.5

)%

2,000

$

367

Outlet stores

134.7

(4.3

)%

3,300

378

Airport stores

12.9

4.1

%

600

1,438

E-commerce

6.3







Seasonal

18.3







Total

$

398.0

The following table contains selected information for each of
our store formats for 2004.

Comparable

Sales per Selling

Sales

Store Sales

Average Size

Square
Foot(1)

(in millions)

(in selling

square feet)

Mall stores

$

246.3

(0.3

)%

2,000

$

388

Outlet stores

139.0

2.0

%

3,300

378

Airport stores

13.6

4.6

%

700

1,650

E-commerce

4.2







Seasonal

17.2







Liquidation

20.8







Total

$

441.1

(1)

Sales per square foot is defined as net sales for stores open a
full 12 months divided by total selling square feet for
stores open a full 12 months.

In 2006, our focus was on creating a new model that would lead
to consistent top-line performance while maintaining merchandise
margins, cash position, the health of our balance sheet, and a
rational store count. To that end we planned to pursue four
initiatives:

planning the launch of a new store concept in the future, which
was to focus on
mid-to-higher-end
accessory offerings with a limited assortment of
outerwear; and



developing a wholesale business to sell proprietary licensed and
branded leather products in geographies and product categories
outside our current markets and product mix.

Throughout 2006, we aggressively pursued our strategic
initiative related to the reengineering of our mall stores. This
included transitioning our merchandise to a newer, fresher and
less outerwear dependent product mix and making a significant
investment in new store fixtures. In addition, our product
presentation, pricing strategies and store
set-ups were
also updated giving our mall stores a fresh and clean look that
is much easier to shop. These changes were all made with the
goal of transitioning our customer base toward a more
value-oriented, fashion-focused customer. The transformation of
our mall stores was substantially completed in the third quarter
of 2006 in advance of the holiday selling season.

We also implemented new marketing packages within our outlet
division differentiated from our mall stores. Merchandising
within the outlet stores improved, including more opportunistic
purchases from third-party vendors, as well as our traditional
suppliers.

While we planned to develop a new accessory store concept that
would focus on
mid-to-higher-end
fashion accessory offerings, the significant effort involved in
transforming our mall stores has led us to abandon these plans
for the near future.

Our efforts in the wholesale channel should enable us to grow
our wholesale business to sell proprietary licensed and branded
leather products in geographies and product categories outside
our current markets and product mix. We plan to continue our
efforts to grow our wholesale business in 2007.

These initiatives were part of a multi-year, multi-format
strategy intended to move Wilsons Leather into a stronger
position as a company and a more relevant brand for the future.
From the outset, we believed the impact of our efforts related
to these strategies would not be realized until after 2006. As
we anticipated, the changes to the physical layout of our mall
stores, our new product mix and new merchandise strategies have
taken time to resonate with our new target customer. The future
success of these initiatives is dependent upon our ability to
transition our target customer base and increase acceptance of
the Wilsons Leather brand.

We believed that the 2006 holiday selling season would provide
confirmation that these strategies, particularly the
transformation of our mall stores, were gaining traction with
our new target customer. However, we experienced a significant
decrease in holiday selling season traffic and the resulting
21.6% decrease in our fourth quarter comparable store sales was
evidence that the migration to our new target customer will take
additional time and our strategic course will need to be refined
to improve top-line performance.

In 2007, we plan to build on the reinvented Wilsons
Leather we worked to create in 2006 and increase recognition and
acceptance of the Wilsons Leather brand. We will continue
to appeal to a more contemporary and upscale target customer. We
do not intend to revert to the promotional price
only environment of crowded stores and unattractive
presentations that was our past. We will continue to increase
our accessories profile by offering new collections of high
quality, high fashion handbags. In addition, we will increase
the number of designer labels we

carry in our outerwear offerings to help generate additional
traffic into our stores and add credibility to the Wilsons
Leather brand.

We intend the discussion of our financial condition and results
of operations that follows to provide information that will
assist in understanding our consolidated financial statements,
the changes in certain key items in those consolidated financial
statements from year to year and the primary factors that
accounted for those changes, as well as how certain accounting
principles, policies and estimates affect our consolidated
financial statements.

Critical
Accounting Policies

Our significant accounting policies are described in
Note 1, Summary of significant accounting
policies, contained in our consolidated financial
statements beginning on
page F-7
of this report. We believe that the following discussion
addresses our critical accounting policies, which are those that
are most important to the portrayal of our financial condition
and results of operations and require managements most
difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that
are inherently uncertain.

Inventories

We value our inventories, which consist primarily of finished
goods held for sale purchased from domestic and foreign vendors,
at the lower of cost or market value, determined by the retail
inventory method using the
last-in,
first-out (LIFO) basis. As of February 3, 2007
and January 28, 2006, the LIFO cost of inventories
approximated the
first-in,
first-out cost of inventories. The inventory cost includes the
cost of merchandise, freight, duty, sourcing overhead, and other
merchandise-specific charges. A periodic review of inventory
quantities on hand is performed to determine if inventory is
properly stated at the lower of cost or market. Management
evaluates several factors related to valuing inventories at the
lower of cost or market such as anticipated consumer demand,
fashion trends, expected permanent retail markdowns, the aging
of inventories, and class or type of inventories. A provision is
recorded to reduce the cost of inventories to the estimated net
realizable values, if required.

Permanent markdowns designated for clearance activity are
recorded at the point of decision, when utility of inventory has
diminished, versus the point of sale. Factors considered in the
determination of permanent markdowns include current and
anticipated demand, customer preferences, age of the
merchandise, and style trends. The corresponding reduction to
gross margin is also recorded in the period that the decision is
made.

Shrinkage is estimated as a percentage of sales for the period
from the last inventory date to the end of the fiscal year.
Physical inventories are taken at least biannually for all
stores and distribution centers and inventory records are
adjusted accordingly. The shrink rate for the most recent
physical inventory, in combination with current events and
historical experience, is used as the accrual rate to record
shrink for the next inventory cycle.

Any significant unanticipated changes in the factors noted above
could have a significant impact on the value of our inventories
and our reported operating results.

Property
and Equipment Impairment

Our property and equipment consists principally of store
leasehold improvements and store fixtures and are included in
the Property and equipment line item in our
consolidated balance sheets in our consolidated financial
statements. These long-lived assets are recorded at cost and are
amortized using the straight-line method over the lesser of the
applicable store lease term or the estimated useful life of the
leasehold improvements. The typical initial lease term for our
stores is 10 years. Computer hardware and software and
distribution center equipment are amortized over three to five
years and 10 years, respectively. We review long-lived
assets for impairment whenever events, such as decisions to
close a store or changes in circumstances, indicate that the
carrying value of an asset may not be recoverable. In the fourth
quarter of 2006, we determined, based on our most recent sales
projections for various markets in which we have stores, that
the current estimate of the future undiscounted cash flows in
certain of these markets would not be sufficient to recover the
carrying value of those markets mall store fixed assets.
Accordingly, we recorded an impairment loss of $0.7 million
in the fourth quarter of 2006 related to those mall stores
assets. Such assets were written down to fair value less the
expected disposal value, if any, of such furniture, fixtures and
equipment. We determined that these assets had no fair value, as
the majority of such assets relate to

leasehold improvements and other store-specific fixtures and
equipment. This impairment charge was recorded as a component of
selling, general and administrative expenses. During 2005 and
2004, our impairment testing did not indicate any impairment and
no such charge was recorded in either year.

Results
of Operations

Overview

In evaluating our financial performance and operating trends,
management considers information concerning our operating income
(loss), net income (loss), basic and diluted income (loss) per
share and certain other information before liquidation and
restructuring costs that are not calculated in accordance with
U.S. generally accepted accounting principles
(GAAP). See Note 2, Reorganization and
partial store liquidation, to our consolidated financial
statements beginning on
page F-14
of this report. A reconciliation of these non-GAAP financial
measures to GAAP numbers for the
year-to-date
period ended January 29, 2005 is included in the table
below. We believe that the non-GAAP numbers calculated before
liquidation and restructuring costs recorded in 2004 provide a
useful analysis of our ongoing operating trends and are useful
in comparing operating performance period to period. We
evaluated these non-GAAP numbers calculated before liquidation
and restructuring costs on a quarterly basis in order to measure
and understand our ongoing operating trends. Our management
incentive bonuses for 2004 were based on an earnings before tax
measure calculated before liquidation and restructuring costs.

Includes $27.4 million related to the transfer of inventory
to an independent liquidator in conjunction with the closing of
approximately 111 stores, accelerated depreciation, fixed asset
write-offs, lease termination costs related to store closings,
severance, and other restructuring charges.

The following table contains selected information from our
historical consolidated statements of operations, expressed as a
percentage of net sales:

As reported

For the years ended

February 3,

January 28,

January 29,

2007

2006

2005

NET SALES

100.0

%

100.0

%

100.0

%

COST OF GOODS SOLD, BUYING AND
OCCUPANCY COSTS

72.9

65.0

68.0

Gross margin

27.1

35.0

32.0

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES

34.3

28.4

29.3

DEPRECIATION AND AMORTIZATION

3.9

3.5

6.9

Operating income (loss)

(11.1

)

3.1

(4.2

)

INTEREST EXPENSE, net

0.6

0.8

1.7

INCOME TAX BENEFIT

(1.4

)

(0.8

)

(0.5

)

Income (loss) from continuing
operations

(10.3

)

3.1

(5.4

)

INCOME FROM DISCONTINUED
OPERATIONS, net of tax







Net income (loss)

(10.3

)%

3.1

%

(5.3

)%

The following table contains selected information from our
historical consolidated statements of operations, expressed as a
percentage of net sales for 2004 as adjusted to
exclude the liquidation and restructuring costs:

As adjusted

For the year ended

January 29,

2005

NET SALES

100.0

%

COST OF GOODS SOLD, BUYING AND
OCCUPANCY COSTS

67.3

Gross margin

32.7

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES

26.6

DEPRECIATION AND AMORTIZATION

4.0

Operating income

2.1

INTEREST EXPENSE, net

1.8

INCOME TAX BENEFIT

(0.5

)

Income from continuing operations

0.9

INCOME FROM DISCONTINUED
OPERATIONS, net of tax



Net income

0.9

%

2006
Compared to 2005

Net Sales. 2006 net sales of
$321.3 million decreased 19.3% from $398.0 million in
2005. This decrease in net sales was primarily the result of a
decrease in 2006 comparable store sales of 17.2% compared to a
2.9% decrease in 2005. The decrease in comparable store sales
was experienced in all merchandise lines, with mens down
19.8%, womens down 21.8% and accessories down 11.9%. Mall
and outlet channels were down 22.7% and 8.9%, respectively.

Temporary seasonal stores contributed $18.3 million in net
sales in 2005 compared to $0.6 million in 2006, which
amount in 2006 was generated in the first month of the year. We
have historically supplemented our permanent stores with
temporary seasonal stores during our peak selling season from
October to January. However, operation of our temporary seasonal
stores was suspended in 2006. In 2005, we operated 118 temporary
seasonal

stores. We do not intend to operate any temporary seasonal
stores in the foreseeable future, but may reconsider if
circumstances warrant.

We also had a 1.7% reduction in the average store count
year-over-year.
We opened nine stores and closed 14 stores during 2006 compared
to opening seven stores and closing 21 stores in 2005. As of
February 3, 2007, we operated 417 stores compared to 422 as
of January 28, 2006. Our selling square footage in 2006 was
relatively flat compared to 2005 at 962,100 and 969,900,
respectively.

Lastly, unseasonably warm weather was again experienced
throughout the 2006 holiday selling season and, as in 2005, had
a considerable negative impact on our outerwear sales.

Throughout 2006, we aggressively pursued our strategic
initiative related to the reengineering of our mall stores. This
included transitioning our merchandise to a newer, fresher and
less outerwear dependent product mix. During the first half of
2006 and into the third quarter, receipts of new merchandise
were limited to focus on repositioning our inventory and
eliminating non-go-forward and overstocked inventory including
styles carried over from prior years. This repositioning of our
inventory contributed to the decline in comparable net sales
during 2006.

The significant transition we have undertaken in our Wilsons
Leather mall stores during 2006 leading up to and into the
fourth quarter has also had a negative impact on our comparable
store sales. Our mall stores now have a very different look and
feel, are less crowded and more shoppable. Entering the holiday
selling season, each mall store had been refitted with new
window fixtures, custom wall graphics, display tables, boutique
wall presentations, and new interior signage. Product
presentation and pricing strategies were also updated, all with
the goal of transitioning our customer base toward a more
value-oriented, fashion-focused customer and away from the
price-driven promotional customer we have historically sold to.
The transformation of our mall stores was substantially
completed in the third quarter. We anticipated that these
changes to the physical layout of our mall stores, our new
product mix and new merchandise strategies would take time to
resonate with our new target customer and was part of a
multi-year, multi-format strategy. However, we experienced a
significant decrease in holiday selling season traffic and the
resulting 21.6% decrease in fourth quarter comparable store
sales was evidence that the migration to our new target customer
will take additional time and our strategic course will need to
be refined to improve top-line performance.

Cost of Goods Sold, Buying and Occupancy
Costs. Cost of goods sold, buying and
occupancy costs decreased $24.5 million or 9.5% to
$234.3 million in 2006 from $258.8 million in 2005.
This decrease was driven by: (1) a $30.8 million
decrease in product costs due to the significantly lower sales
volume experienced in 2006 and (2) a $0.7 million
decrease in buying and occupancy costs relating to our decreased
receipts during the year and the reduction in average store
count
year-over-year.
These decreases were somewhat offset by: (1) a
$6.6 million increase in temporary and permanent markdowns
and (2) a $0.4 million increase in delivery and other
costs of sales
year-over-year.

Early in 2006, we took extensive temporary and permanent
markdowns to liquidate and reposition our inventory pursuant to
our strategic initiative relating to the reengineering of our
mall stores product mix. As our product mix strategy
evolved during the year, we continued to take aggressive actions
to reduce our outerwear inventory as well as accelerating
markdowns on certain handbag and accessory inventory in
preparation for the fall implementation of the new look and feel
of our mall stores. Additional markdowns were taken in the
fourth quarter as a result of our lower than planned holiday
sales volume and as a result of our Gift Leather
holiday gift card promotion.

Gross margin dollars decreased $52.2 million, or 37.5%, to
$87.0 million in 2006 compared to $139.2 million in
2005 primarily related to the lower sales volume in 2006
compared to 2005. In addition, temporary seasonal stores
contributed $7.4 million in gross margin in 2005 compared
to $0.2 million in the first month of 2006.

Gross margin as a percentage of net sales decreased by
790 basis points to 27.1% in 2006 compared to 35.0% in 2005
primarily due to: (1) the de-leveraging resulting from our
comparable store sales, which resulted in a 420 basis point
increase in buying and occupancy costs as a percentage of net
sales, (2) a 330 basis point decrease in merchandise
margins resulting from a 170 basis point increase in
initial markups offset by a 500 basis point increase

in markdowns as a percentage of net sales due to the aggressive
2006 markdowns discussed above and (3) a 40 basis
point increase in delivery and other costs of goods sold as a
percentage of net sales.

Selling, General and Administrative
Expenses. Selling, general and administrative
(SG&A) expenses decreased $2.7 million or
2.4% to $110.2 million in 2006 from $112.9 million in
2005. As a percentage of net sales, 2006 SG&A expenses
increased to 34.3% from 28.4% in the similar period last year.
The increase in percentage rate is the result of our lower sales
volume, which more than offset the decrease in SG&A spending.

The $2.7 million decrease in 2006 SG&A spending was
primarily due to a net $7.7 million decrease in store
related expenses resulting from our lower sales volume and
reduced store count as we operated on average seven fewer stores
in 2006 compared to the similar period last year. This decrease
included: (1) $3.9 million in reduced payroll costs,
as our overall payroll hours were lower
year-over-year
consistent with our decreased sales levels,
(2) $1.4 million decreased shrink expense,
(3) $1.5 million decreased credit card fees due to
lower transaction volume and a refund of prior fees received as
part of the VISA/MasterCard antitrust litigation settlement, and
(4) $1.7 million in net lower administrative costs,
all of which were somewhat offset by $0.8 million in lower
layaway and other service fees. Layaway purchases were
discontinued in December 2006 and for the foreseeable future.
Suspending operation of our temporary seasonal stores in 2006
accounted for $4.5 million of the decrease in store related
expenditures.

The decrease in store related spending was mostly offset by:
(1) a $2.3 million charge related to stock-based
compensation costs recorded in 2006 with the adoption of
Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R), with no corresponding
amount in the similar period last year,
(2) $0.7 million of spending related to the
start-up of
our wholesale operations, (3) a $0.7 million asset
impairment loss related to certain mall stores, (4) a
$0.5 million increase in promotional spending related to
the rollout of our reengineered mall stores (primarily print ad
buys for the holiday selling season), and (5) a
$0.8 million net increase in other administrative costs
including increased spending on medical/dental insurance claims
and workers compensation expenditures as well as the estimated
settlement of certain infringement claims somewhat offset by
lower payroll costs. Administrative costs related to operation
of our temporary seasonal stores were $1.4 million lower in
2006 as compared to 2005.

Depreciation and Amortization. 2006
depreciation and amortization decreased $1.6 million to
$12.5 million compared to $14.1 million in 2005. The
decrease was primarily the result of: (1) $0.9 million
net expense related to assets fully depreciated in the prior
year, primarily store cash register hardware and software,
(2) a decrease of $0.5 million in accelerated
depreciation related to known store closings in 2006 compared to
last year and (3) a decrease in store depreciation due to a
1.7% decrease in the
year-to-date
average store count. As a percentage of net sales, depreciation
and amortization increased to 3.9% from 3.5% last year.

Operating Income (Loss). As a result of
the above, 2006 operating income (loss) decreased
$47.9 million to an operating loss of $35.6 million
compared to operating income of $12.3 million in 2005. This
decline in operating performance was due to: (1) a
$52.2 million decrease in gross margin somewhat offset by,
(2) a $2.7 million decrease in SG&A spending in
the current year compared to last year and (3) a
$1.6 million decrease in depreciation and amortization. The
decreased operating performance in 2006 is reflective of the
significant efforts we have undertaken to transition Wilsons
Leather pursuant to our strategic initiatives, which have had a
negative impact on our results.

Interest Expense. Net interest expense
of $1.9 million in 2006 decreased $1.3 million
compared to $3.2 million in 2005. The net decrease was due
to a $0.6 million decrease in interest expense in the
current year compared to 2005, as we had lower average
borrowings in 2006 compared to 2005. In addition, interest
income increased $0.8 million
year-over-year,
as our average cash balances during 2006 were higher than 2005.
These amounts were slightly offset by $0.1 million in debt
issuance costs written off in the fourth quarter of 2006
relating to our amended credit facility.

Income Tax Benefit. In 2006, we
recorded a net income tax benefit of approximately
$4.4 million compared to a net benefit of $3.1 million
recorded in 2005. The net benefit recorded in the current year
related primarily to the reduction of the income tax provision
we recorded in the fourth quarter of 2005 and the release of
certain state income tax contingency reserves. Due to our July
tax year end, we recorded a provision in the fourth quarter of
2005

for income taxes due based on taxable income through the first
half of the tax year. As a result of the net loss incurred in
the first six months of 2006, the taxable income and related
income taxes due as of the end of 2005 were reduced. Subsequent
to our July 2006 tax year end, we elected to conform our tax
year end to our fiscal year end as of February 3, 2007.
Therefore, fluctuations created by different book and tax year
ends will be eliminated going forward. See Note 9,
Income taxes contained in our consolidated financial
statements.

Net Income (Loss). Our net loss for
2006 was $33.1 million compared to net income of
$12.2 million in 2005, or a loss of $0.85 per basic
and diluted common share in 2006 compared to income in 2005 of
$0.31 and $0.30 per basic and diluted common share,
respectively. The $45.3 million decline in our 2006 net
income was primarily the result of our decreased net sales and
lower gross margins, which were slightly offset by decreased
SG&A spending, decreased depreciation and decreased net
interest expense (all discussed above).

2005
Compared to 2004

Net Sales. Net sales decreased 9.8% to
$398.0 million in 2005 from $441.1 million in 2004.
Included in the 2004 net sales were approximately
$20.8 million in sales recorded in the first quarter of
2004 resulting from the liquidation of 111 stores. See
Note 2, Reorganization and partial store
liquidation to our consolidated financial statements.
Excluding these liquidation sales, 2005 net sales of
$398.0 million decreased 5.3% from $420.3 million in
2004. This decrease is the result of our operating on
average 24 fewer stores in 2005 compared to 2004 as well as
a 2.9% decrease in comparable store sales for 2005 compared to a
0.6% increase in 2004.

The decrease in comparable store sales for 2005 was primarily
the result of: (1) the unseasonably warm weather
experienced over most of the country during the fall season,
which had a considerable negative impact on our outerwear sales
and (2) lower than anticipated volume during the holiday
selling season as we faced increased competition from department
and chain stores that have significantly expanded into the
leather outerwear category.

We opened seven stores and closed 21 stores during 2005 compared
to opening five stores and closing 29 stores in 2004 (excluding
the 111 liquidation stores). As of January 28, 2006, we
operated 422 stores compared to 436 as of January 29, 2005.
Our selling square footage in 2005 decreased 3.4% to 969,900
from 1,004,000 in 2004. In addition, we operated 118 temporary
seasonal stores during the 2005 holiday selling season as
compared to 102 temporary seasonal stores during 2004. As
mentioned above, we suspended operation of our temporary
seasonal stores in 2006 and for the foreseeable future, but may
reconsider if circumstances warrant.

Cost of Goods Sold, Buying and Occupancy
Costs. Cost of goods sold, buying and
occupancy costs decreased $41.0 million or 13.7% to
$258.8 million in 2005 from $299.7 million in 2004.
This decrease was partially due to the lower sales volume due to
the $20.8 million of liquidation sales in 2004. When
adjusted to remove the effects of the liquidation and
restructuring charges, cost of goods sold, buying and occupancy
costs decreased $24.0 million, or 8.5%, from
$282.8 million. This decrease is the result of: (1) a
$17.6 million decrease in product costs due to the lower
sales volume discussed above, (2) a $4.4 million
decrease in markdowns, (3) a $1.2 million decrease in
delivery costs, and (4) a $0.8 million decrease in
buying and occupancy costs, which is reflective of a 5.3%
decrease in average store count
year-over-year.
Gross margin dollars decreased $2.1 million, or 1.5%, to
$139.2 million in 2005 compared to $141.4 million in
2004 primarily related to the lower sales volume in 2005
compared to 2004, somewhat offset by improved merchandise
margins discussed below.

Gross margin as a percentage of net sales increased by
300 basis points to 35.0% in 2005 compared to 32.0% in 2004
primarily due to improved merchandise margins resulting from a
600 basis point improvement in initial mark-on and a
$1.7 million decrease in markdowns offsetting a
$2.3 million increase in buying and occupancy costs. The
increase in buying and occupancy costs relates primarily to the
reversal in 2004 of $3.6 million of deferred rent
liabilities related to the closed liquidation stores.

Excluding the effects of the liquidation and restructuring
charges, gross margin increased $1.7 million, or 1.2%, from
$137.5 million in 2004 and as a percentage of net sales was
230 basis points higher than the 32.7% in 2004. This
improvement was the result of a 250 basis point improvement
in initial mark-on, lower markdowns and delivery costs as a
percentage of net sales and a $0.8 million decrease in
buying and occupancy costs.

Selling, General and Administrative
Expenses. SG&A expenses in 2005 of
$112.9 million decreased $16.4 million, or 12.7%, from
$129.2 million in 2004. As a percentage of net sales, 2005
SG&A expenses decreased

to 28.4% compared to 29.3% last year. The $16.4 million
decrease was primarily due to: (1) $17.4 million of
liquidation and restructuring charges incurred in 2004,
primarily related to lease termination costs, asset write-offs
related to store closings, severance, and other restructuring
charges, (2) a $1.9 million decrease in general and
administrative costs due to a $1.5 million decrease in
bonuses accrued in 2005 compared to 2004 and approximately
$0.4 million reduced spending on medical insurance claims
and workers compensation expenditures due to a lower store count
and (3) a decrease in other store expenses of
$0.4 million also due to lower sales volume and reduced
store count. These decreases were somewhat offset by: (1) a
$1.0 million increase in
e-commerce
fulfillment expenses due to higher on-line sales volume,
(2) a $1.5 million increase in selling and field sales
management expenses primarily related to higher payroll rates,
more store hours and floor sets and (3) $0.8 million
in reduced layaway service fees, as we discontinued layaways in
the months of December and January.

SG&A expenses as a percentage of net sales, excluding the
liquidation and restructuring charges (which totaled
$17.4 million, or 83.9% of the
year-to-date
liquidation sales of $20.8 million), increased to 28.4% for
2005 compared to 26.6% for 2004. The increase in rate as a
percentage of net sales reflects our net $1.1 million
increase in spending and the lower sales volume.

Depreciation and
Amortization. Depreciation and amortization
decreased $16.6 million to $14.1 million in 2005
compared to $30.6 million in 2004, and as a percentage of
net sales to 3.5% from 6.9%. The decrease was primarily the
result of the $13.8 million in accelerated depreciation
recorded in 2004 related to the liquidation stores and a
$2.8 million decrease in store and administrative
depreciation due to the 5.3% decrease in average store count
year-over-year.
Excluding the effects of the liquidation and restructuring,
depreciation and amortization decreased $2.8 million to
$14.1 million from $16.8 million a year ago, or as a
percentage of net sales, to 3.5% from 4.0%.

Operating Income (Loss). As a result of
the above, operating income for 2005 increased
$30.8 million to $12.3 million compared to an
operating loss of $18.5 million in 2004. This improvement
was primarily due to: (1) net liquidation and restructuring
charges of $27.4 million in 2004,
(2) $1.7 million in improved gross margin dollars as
compared to 2004 and (3) $2.8 million in decreased
depreciation and amortization expenditures in 2005. These
improvements were somewhat offset by an additional
$1.1 million in SG&A spending
year-over-year.
Excluding the effects of the liquidation and restructuring
charges, 2005 operating income of $12.3 million increased
$3.4 million compared to $8.9 million in 2004.

Interest Expense. Net interest expense
of $3.2 million in 2005 decreased $4.3 million
compared to $7.4 million in 2004, due to the repurchase and
repayment of our
111/4% Senior
Notes in the second and third quarters of 2004, respectively,
the prepayment of $5.0 million of the Term B promissory
note in March 2005, lower revolver borrowings in the third and
fourth quarters of 2005 as compared to the similar periods of
2004 and a $0.6 million increase in interest income in 2005
as compared to 2004. In addition, during the first quarter of
2004 we wrote off $0.5 million of debt issuance costs
related to the amended senior credit facility. The liquidation
and restructuring did not impact interest expense.

Income Tax Benefit. For 2005, we
recorded a net income tax benefit of approximately
$3.1 million compared to a net benefit of $2.2 million
in 2004. The 2005 net benefit was comprised of: (1) a
$5.6 million benefit as a result of both a reduced tax
basis of our LIFO inventory reserve and a tax planning strategy
that allowed us to maintain a valuation allowance on the net
deferred tax assets inclusive of the LIFO reserve, (2) a
$1.7 million benefit related to the resolution of certain
income tax contingencies previously accrued as a result of an
Internal Revenue Service review of amended returns completed in
our second quarter and (3) a $4.2 million provision
for income taxes due. See Note 9, Income taxes
contained in our consolidated financial statements.

Income from Discontinued Operations. We
reported no income from discontinued operations in 2005 compared
to $0.2 million net of tax in 2004.

Net Income (Loss). Net income for 2005
improved $35.8 million to $12.2 million compared to a
net loss of $23.6 million in 2004. The improvement in net
income was primarily due to the $27.4 million net loss
relating to the 2004 liquidation and restructuring as well as
our improved gross margins and decreased depreciation and
interest expense somewhat offset by increased SG&A expenses
(all discussed above). Excluding the effects of the liquidation
and restructuring, net income of $12.2 million increased
$8.4 million compared to $3.8 million in 2004.

Our capital requirements are primarily driven by our seasonal
working capital needs, investments in new stores, remodeling
existing stores, enhancing information systems, and increasing
capacity and efficiency for our distribution center. In
addition, implementation of our key initiatives relating to our
new multi-format model, increasing recognition and acceptance of
the Wilsons Leather brand and continuing to develop our
wholesale business require significant resources including
capital dollars. Our peak working capital needs typically occur
during the period from August through early December as
inventory levels are increased in advance of our peak selling
season from October through January.

Our future capital requirements depend on the sustained demand
for our leather products. Many factors affect the level of
consumer spending on our products, including, among others,
general economic conditions, including rising energy prices,
customer shopping patterns, interest rates, the availability of
consumer credit, weather, the outbreak of war, acts of terrorism
or the threat of either, other significant national and
international events, taxation, and consumer confidence in
future economic conditions. Consumer purchases of discretionary
items such as our leather products tend to decline during
periods when disposable income is lower. The uncertain outlook
in the United States economy has shifted consumer spending
habits toward large discount retailers, which has decreased mall
traffic, resulting in lower net sales on a quarterly and annual
basis.

Our ability to meet our debt service obligations depends upon
our future performance, which will be subject to general
economic conditions and financial, business and other factors
affecting our operations, or our ability to raise additional
capital, which may not be available on terms that are favorable
to us, or at all. If we are unable to generate sufficient cash
flow from operations or financing activities in the future to
service our debt, we may be required to obtain additional debt
or equity financing. There can be no assurance that any such
additional financing would be possible or could be obtained on
terms that are favorable to us, or at all.

General Electric Capital Corporation and a syndicate of banks
have provided us with a senior credit facility, as amended, that
provides for borrowings of up to $135.0 million in
aggregate principal amount, including a $20.0 million Term
B promissory note and a $75.0 million letter of credit
subfacility. The maximum amount available under the revolving
credit portion of our senior credit facility is limited to:



90% of the then applicable discount rate applied in appraising
eligible retail inventories to reflect their value as if sold in
an orderly liquidation, plus the lesser of 10% of various
components of the borrowing base or the then outstanding
principal balance of the Term B promissory note, except that
such amount is reduced by the amount of certain in-transit
inventory to the extent such inventory reflects a
disproportionate amount of our total inventory;



plus the lesser of $10.0 million or 50% of the difference
between the book value of eligible wholesale inventory and the
book value of eligible wholesale inventory in-transit in excess
of $5.0 million;



plus 90% of the discount rate applied in appraising retail
inventories to reflect their value as if sold in an orderly
liquidation, times the future retail inventory subject to trade
letters of credit;



plus 50% of the book value of our future wholesale inventories
related to trade letters of credit;



plus 90% of credit card receivables;



plus the lesser of $10.0 million or 90% of eligible
wholesale accounts receivable; and



minus a reserve equal to the outstanding principal amount of the
Term B promissory note ($20.0 million as of
February 3, 2007) and a separate reserve equal to 10%
of the lesser of $115.0 million and the maximum amount
calculated under the formula described above.

As of February 3, 2007, we had no borrowings under the
revolving portion of the senior credit facility and the Term B
promissory note had a balance of $20.0 million and we had
$3.8 million in outstanding letters of credit.

Interest is currently payable on revolving credit borrowings at
variable rates determined by the applicable LIBOR plus 1.25% to
1.75%, or the prime rate plus 0.0% to 0.5% (commercial paper
rate plus 1.25% to 1.75% if the loan is made under the
swing line portion of the revolver). Interest is
currently payable on the Term B promissory note at a variable
rate equal to the LIBOR plus 4.0%. The applicable margins will
be adjusted quarterly on a prospective basis as determined by
the previous quarters ratio of borrowings to borrowing
availability.

We pay monthly fees of 0.25% per annum on the unused
portion of the senior credit facility, as defined, and per annum
fees on the average daily amount of letters of credit
outstanding during each month ranging from .625% to .875% in the
case of trade letters of credit and from 1.25% to 1.75% in the
case of standby letters of credit. Such fees are subject to
quarterly adjustment in the same manner as our interest rate
margins. The senior credit facility expiration is June 30,
2010, at which time all borrowings, including the Term B
promissory note, become due and payable. Prepayment of the Term
B promissory note is payable only with the consent of the senior
lenders. Any such prepayment would be subject to a 1.0%
prepayment fee if prepayment is made on or prior to
June 30, 2008 and a 0.5% prepayment fee if prepayment is
made after June 30, 2008 but on or prior to June 30,
2009. After June 30, 2009, any remaining balance of the
Term B promissory note is prepayable without penalty. The
revolving credit portion of the senior credit facility is
subject to a 1.0% prepayment fee under most circumstances.

The senior credit facility contains certain restrictions and
covenants, which, among other things, restrict our ability to
acquire or merge with another entity; make investments, loans or
guarantees; incur additional indebtedness; create liens or other
encumbrances; or pay cash dividends or make other distributions.
At February 3, 2007, we were in compliance with all
covenants related to the senior credit facility.

We plan to use the senior credit facility for our immediate and
future working capital needs. We are dependent on the senior
credit facility to fund working capital and letter of credit
needs. Based on our current 2007 plan, we believe that the
borrowing capacity under our senior credit facility, together
with cash on hand, current and anticipated cash flow from
operations, and cost reductions associated with our lower store
count will be adequate to meet our working capital and capital
expenditure requirements through the first half of 2008.
However, if our comparable store sales do not increase as
planned in the second half of 2007, we expect that we may need
additional financing in 2008 in order to fund our working
capital and capital expenditure requirements. Even if our
performance during 2007 is on track with plan, we may also seek
to obtain additional financing during 2007 for 2008 working
capital needs as well as the ability to accelerate
implementation of our merchandise and brand acceptance
strategies. We are currently exploring various financing
strategies. There can be no assurance that additional financing
would be possible or could be obtained on terms that are
favorable to us, or at all. If we are not able to obtain such
access to capital, we may not be able to implement our key
initiatives to grow our business. If we raise capital through
the issuance of equity securities, the holdings of existing
shareholders may be diluted.

On January 22, 2004, we announced a reorganization and
partial store liquidation as described in Note 2,
Reorganization and partial store liquidation
contained in our consolidated financial statements.

On April 25, 2004, we entered into an agreement to issue
17,948,718 shares of our common stock to three
institutional investors at a price of $1.95 per share. The
equity financing closed on July 2, 2004, with gross
proceeds of $35.0 million before offering costs. As
additional consideration for the investors commitment, on
April 25, 2004, we issued two million warrants exercisable
for five years to the investors upon signing the equity
financing agreement, and at closing issued an additional two
million warrants exercisable for five years, all at an exercise
price of $3.00 per share of common stock. The proceeds of
the offering were used to repurchase and repay our
111/4%
Senior Notes. The remaining balance of these funds was used for
general working capital purposes. See Note 10,
Capital Stock contained in our consolidated
financial statements.

Operating Activities. In 2006,
operating activities of continuing operations used net cash of
$14.6 million compared to providing net cash of
$11.0 million in 2005 and 2004, respectively.

Net cash utilized by operating activities in 2006 of
$14.6 million was comprised of: (1) our net loss from
continuing operations of $33.1 million, (2) a
$5.4 million net decrease in income taxes payable and other
liabilities primarily resulting from a decrease of
$4.8 million in taxes payable due to the income tax benefit
recorded in 2006 and a $0.6 million decrease in our
straight line rent liability and (3) a $4.8 million
increase in prepaid expenses primarily related to the timing of
rent payments.

These were somewhat offset by the following sources of cash:
(1) $13.2 million in non-cash adjustments for
depreciation and amortization, (2) a $10.7 million
decrease in inventories resulting from our aggressive management
of inventory levels in 2006, (3) $2.3 million in
non-cash charges related to stock-based compensation costs,
(4) a $0.9 million decrease in net accounts receivable
primarily relating to outstanding insurance claims for damages
caused by Hurricane Katrina in 2005 and paid in 2006, as well as
decreased credit card and construction allowance receivables,
(5) a $0.7 million increase in accounts payable and
accrued expenses primarily due to increased customer payables
related to outstanding gift cards, and (6) a
$0.7 million non-cash charge related to the asset
impairment loss we recorded for certain of our mall stores in
2006.

The $11.0 million of net cash provided by operating
activities in 2005 was comprised of: (1) net income from
continuing operations of $12.2 million,
(2) $14.7 million in non-cash adjustments for
depreciation and amortization, (3) a $1.3 million
decrease in prepaid expenses due to the timing of rent payments
and marketing promotions, (4) a $0.8 million net
increase in income taxes payable and other liabilities primarily
due to an increase of $1.4 million in taxes payable
somewhat offset by a $0.5 million decrease in our straight
line rent liability, and (5) a decrease in inventories of
$0.4 million.

These sources of cash were partially offset by: (1) a
$12.3 million decrease in accounts payable and accrued
expenses primarily due to a $5.8 million decrease in
accounts payable related to lower levels of in-transit inventory
in 2005 as compared to 2004 and a $6.5 million decrease in
accrued expenses primarily due to payroll expenses related to
bonus and severance, as well as decreased accrued sales tax
resulting from our lower sales volume, (2) a
$5.5 million decrease in our deferred tax liability and
(3) an increase in accounts receivable of $0.4 million
primarily due to outstanding tenant allowances receivable from
landlords and insurance proceeds receivable related to Hurricane
Katrina damages, somewhat offset by reduced credit card
receivables resulting from our lower sales volume.

The $11.0 million of cash provided by operating activities
in 2004 was comprised of: (1) $34.0 million in
non-cash adjustments for depreciation, amortization, property
and equipment impairment, and restricted stock compensation
expense (including $13.8 million in accelerated
depreciation related to the liquidation and restructuring
activities), (2) a $3.2 million decrease in
inventories (due to a $14.6 million decrease in liquidation
inventory offset by increased in-transit of new inventory
receipts as of the end of 2004), (3) a $2.5 million
decrease in accounts receivable due primarily to reduced credit
card receivables as a result of the lower sales volume,
(4) a $2.2 million

increase in accounts payable and accrued expenses primarily due
to increased accounts payable related to in-transit inventory as
partially offset by decreased accrued expenses as a result of
the overall headcount and store reduction in 2004, and
(5) a $0.5 million decrease in prepaid expenses
primarily related to decreased marketing pre-payments.

These sources of cash were partially offset by: (1) a
net loss from continuing operations of $23.8 million,
(2) a $2.6 million decrease in our deferred income tax
liability primarily related to our decreased LIFO inventory
reserve and (3) a $5.0 million decrease in our income
tax and other liability accounts.

Investing Activities. In 2006,
continuing operations investing activities were a net
$11.0 million with capital expenditures of
$11.1 million being somewhat offset by $0.1 million of
proceeds on the disposition of property and equipment. Capital
expenditures in 2006 included: (1) $6.0 million for
the construction of new stores and the renovation of and
improvements to existing stores, (2) $2.2 million in
new fixtures for our mall stores, (3) $2.0 million in
information systems projects including new cash register CPUs
and printers for our stores, (4) a $0.5 million
automated conveyor system in our distribution center, and
(5) $0.4 million in other administrative fixed assets.

Investing activities of continuing operations in 2005 were
$10.0 million including capital expenditures of
$10.3 million partially offset by $0.3 million from
proceeds on the disposition of property and equipment. Capital
expenditures in 2005 were comprised of:
(1) $7.1 million for the construction of new stores
and the renovation of and improvements to existing stores,
including new store fixtures, (2) $0.9 million for
wireless handheld computer technology related to receiving and
pricing for store operations, (3) $0.8 million for
point-of-sale
hardware, (4) $0.4 million for distribution center
equipment, and (5) $1.1 million in other
administrative fixed assets.

Investing activities of continuing operations for 2004 were
comprised of $4.8 million in capital expenditures primarily
for the construction of new stores and the renovation of and
improvements to existing stores, partially offset by
$0.2 million from the proceeds on the sale of property and
equipment.

Financing Activities. In 2006,
financing activities utilized net cash of $0.1 million,
with $0.4 million in debt acquisition costs relating to our
restated credit agreement offsetting $0.3 million in
proceeds from the issuance of common stock from the exercise of
stock options, share grants to our non-employee directors and
from our employee stock purchase plan.

In 2005, financing activities utilized net cash of
$4.2 million primarily due to $5.0 million used for
pre-payment of a portion of our Term B promissory note, somewhat
offset by $0.8 million provided by the issuance of common
stock primarily from the exercise of stock options.

Cash provided by financing activities in 2004 was
$0.2 million as a result of $32.5 million in net
proceeds from the equity financing completed on July 2,
2004, as offset by: (1) $30.6 million used to
repurchase and repay our
111/4%
Senior Notes, (2) $0.6 million in reduced other
borrowings and (3) $1.2 million used for debt
acquisition costs related to amendments to our senior credit
facility in April 2004.

Contractual Obligations and Commercial
Commitments. We have entered into agreements
that create contractual obligations and commercial commitments.
These obligations and commitments will have an impact on future
liquidity and the availability of capital resources. The tables
presented below summarize these obligations and commitments.

We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in our financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

Seasonality
and Inflation

A majority of our net sales and operating profit is generated in
the peak selling period from October through January, which
includes the holiday selling season. As a result, our annual
operating results have been, and will continue to be, heavily
dependent on the results of our peak selling period. Net sales
are generally lowest during the period from April through July,
and we typically do not become profitable, if at all, until the
fourth quarter of a given year. Most of our stores are
unprofitable during the first three quarters. Conversely, in a
typical year nearly all of our stores are profitable during the
fourth quarter, even those that may be unprofitable for the full
year. Historically, we have opened most of our stores during the
last half of the year. As a result, new mall stores opened just
prior to the fourth quarter produce profits in excess of their
annualized profits since the stores typically generate losses in
the first nine months of the year.

We do not believe that inflation has had a material effect on
the results of operations during the past three years; however,
there can be no assurance that our business will not be affected
by inflation in the future.

Discontinued
Operations

In November 2002, we liquidated our Travel Subsidiaries (El
Portal Group, Inc., Bentleys Luggage Corp. and Florida
Luggage Corp.), which were presented as a discontinued operation
in the applicable years financial statements. In 2004, we
recorded $0.3 million in income from discontinued
operations representing the reversal of the 2004 balance of the
discontinued operations liabilities, related to lease
termination and store closing costs, that were no longer
required. This resulted in $0.2 million in income from
discontinued operations net of tax, or $0.01 net income per
share. As of February 3, 2007 and January 28, 2006,
there were no assets or liabilities related to our discontinued
operations.

Reorganization
and Partial Store Liquidation

On January 22, 2004, we announced that we would liquidate
up to 100 underperforming mall and outlet stores (subsequently
revised to 111 stores) and eliminate approximately 950
store-related positions. We entered into an Agency Agreement
with a joint venture comprised of Hilco Merchant Resources, LLC,
Gordon Brothers Retail Partners, LLC and Hilco Real Estate, LLC
(the Hilco/Gordon Brothers Joint Venture) to
liquidate the inventory in the 111 stores and assist in the
discussions with landlords regarding lease terminations in
approximately 94 of these stores. Pursuant to the Agency
Agreement, the Hilco/Gordon Brothers Joint Venture guaranteed us
an amount of 84.0% of the cost value of the inventory, subject
to certain adjustments. The Hilco/Gordon Brothers Joint Venture
was responsible for all expenses related to the sale. In
addition, we announced that we would eliminate approximately 70
positions at our corporate headquarters in Brooklyn Park,
Minnesota and distribution centers located in

Minnesota and Nevada, as well as the closure of our distribution
center in Las Vegas, Nevada, to better align our financial
structure with current business conditions. See Note 2,
Reorganization and partial store liquidation
contained in our consolidated financial statements.

For these actions we incurred charges related to the
restructuring and partial store liquidation of
$27.4 million during 2004 primarily related to the transfer
of inventory to an independent liquidator in conjunction with
the closing of the liquidation stores, lease termination costs,
accelerated depreciation, asset write-offs related to store
closings, severance, and other restructuring costs. In 2004, a
total of $17.4 million and $13.8 million of these
charges were recorded in selling, general and administrative
expenses and depreciation and amortization, respectively, as
partially offset by $3.8 million of gross margin earned on
the liquidation sales. The liquidation sales were completed in
April 2004, and as of May 1, 2004, all the liquidation
stores had been closed. As of October 30, 2004, we had
successfully negotiated all of the lease terminations. The
overall net cash outlay for the restructuring activities was
slightly negative.

Quarterly
Results

The following table sets forth certain unaudited consolidated
financial information from our historical consolidated
statements of operations for each fiscal quarter of 2006 and
2005. This quarterly information has been prepared on a basis
consistent with our audited consolidated financial statements
appearing elsewhere in this
Form 10-K
and reflects adjustments which, in the opinion of management,
consist of normal recurring adjustments necessary for a fair
presentation of such unaudited quarterly results when read in
conjunction with the audited consolidated financial statements
and notes thereto. (In thousands, except per share amounts):

Quarter
ended(1)

Fiscal 2006

Fiscal 2005

Feb. 3,

Oct. 28,

Jul. 29,

April 29,

Jan. 28,

Oct. 29,

Jul. 30,

April 30,

2007(2)

2006

2006

2006

2006

2005

2005

2005

Net sales

$

132,967

$

64,457

$

49,158

$

74,680

$

178,851

$

76,389

$

58,417

$

84,329

Gross margin

49,982

15,421

1,878

19,730

80,262

20,157

13,428

25,385

Operating income (loss)

12,867

(14,132

)

(25,323

)

(9,022

)

40,477

(10,344

)

(14,721

)

(3,130

)

Net income (loss)

$

11,964

$

(14,057

)

$

(24,502

)

$

(6,500

)

$

41,714

$

(11,716

)

$

(13,993

)

$

(3,793

)

Basic income (loss) per
share:

Net income (loss)

$

0.31

$

(0.36

)

$

(0.63

)

$

(0.17

)

$

1.07

$

(0.30

)

$

(0.36

)

$

(0.10

)

Diluted income (loss) per
share:

Net income (loss)

$

0.31

$

(0.36

)

$

(0.63

)

$

(0.17

)

$

1.04

$

(0.30

)

$

(0.36

)

$

(0.10

)

(1)

The sum of the per share amounts for the quarters does not equal
the totals for the year due to the application of the treasury
stock method.

(2)

The quarter ended February 3, 2007 is a fourteen-week
quarter; all other quarters presented are thirteen-week quarters.

Recently
Issued Accounting Pronouncements

See Note 1, Summary of significant accounting
policies, contained in our consolidated financial
statements, for a full description of recent accounting
pronouncements, including the respective expected dates of
adoption and effects on results of operations and financial
condition.

At February 3, 2007, we had cash and cash equivalents
totaling $19.9 million. The effect of a 100 basis
point change in interest rates would have an estimated
$0.2 million pre-tax earnings and cash flow impact,
assuming other variables are held constant.

Our senior credit facility carries interest rate risk that is
generally related to the LIBOR, the commercial paper rate or the
prime rate. If any of those rates were to change while we were
borrowing under the senior credit facility, interest expense
would increase or decrease accordingly. As of February 3,
2007, there were no outstanding borrowings under the senior
credit facility, $20.0 million outstanding on the Term B
promissory note, and $3.8 million in outstanding letters of
credit.

Item 8.

Financial
Statements and Supplementary Data

Consolidated financial statements required pursuant to this Item
begin on
page F-1
of this
Form 10-K.
Pursuant to the applicable accounting regulations of the
Securities and Exchange Commission, we are not required to
provide supplementary data.

Item 9.

Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

Item 9A.

Controls
and Procedures

Evaluation
of Disclosure Controls and Procedures

We have established and maintain disclosure controls and
procedures that are designed to ensure that material information
relating to us and to our subsidiaries required to be disclosed
by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. We carried out
an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and
chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that
evaluation, the chief executive officer and chief financial
officer concluded that our disclosure controls and procedures
were effective as of the date of such evaluation.

Managements
Report on Internal Controls and Procedures

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is a process designed by, or
under the supervision of, our chief executive and chief
financial officers and effected by our board of directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles and includes those policies and procedures that:

(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;

(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with the authorizations of our
management and directors; and

(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.

Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject
to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control
over financial reporting as of February 3, 2007. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control-Integrated Framework. Based on this
assessment, our management concluded that our internal control
over financial reporting was effective as of February 3,
2007.

We have audited managements assessment, included in the
accompanying report entitled Managements Report on
Internal Control and Procedures, that Wilsons The Leather
Experts Inc. (the Company) maintained effective
internal control over financial reporting as of February 3,
2007, based on criteria established in Internal
Control  Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that Wilsons The
Leather Experts Inc. maintained effective internal control over
financial reporting as of February 3, 2007, is fairly
stated, in all material respects, based on criteria established
in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of February 3, 2007, based on
criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Wilsons The Leather Experts Inc.
and subsidiaries as of February 3, 2007, and
January 28, 2006, and the related consolidated statements
of operations, shareholders equity, and cash flows for
each of the fiscal years in the three-year period ended
February 3, 2007, and our report dated March 30, 2007
expressed an unqualified opinion on those consolidated financial
statements.

There were no changes in the our internal control over financial
reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Certain information required by Part III is incorporated by
reference from our definitive Proxy Statement for the 2007
Annual Meeting of Shareholders (the Proxy
Statement), which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within
120 days after February 3, 2007.

Except for those portions specifically incorporated in this
Form 10-K
by reference to our Proxy Statement, no other portions of the
Proxy Statement are deemed to be filed as part of this
Form 10-K.

Item 10.

Directors,
Executive Officers and Corporate Governance

Incorporated by reference in this
Form 10-K
is the information appearing under the headings Election
of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance in our Proxy Statement. For
information concerning executive officers and family
relationships between any director or executive officer, see
Item 4A. Executive Officers of the Registrant
in this
Form 10-K.

In March 2004, we adopted a Code of Business Ethics and Conduct
applicable to all associates and directors of our company,
including our chief executive officer, chief operating officer,
chief financial officer, controller, treasurer, and other
employees performing similar functions. A copy of the Code of
Business Ethics and Conduct was filed as Exhibit 14.1
incorporated by reference to our 2004
Form 10-K.
We intend to file on our Web site any amendments to, or waivers
from, our Code of Business Ethics and Conduct within four
business days of any such amendment or waiver. We intend to post
on our Web site any amendments to, or waivers from, our Code of
Business Ethics and Conduct that apply to our principal
executive officer, principal financial officer, principal
accounting officer, controller, and other persons performing
similar functions promptly following the date of such amendment
or waiver. A copy of our Code of Business Ethics and Conduct is
also available on our Web site (www.wilsonsleather.com).

Item 11.

Executive
Compensation

Incorporated by reference in this
Form 10-K
is the information appearing under the heading Executive
Compensation in our Proxy Statement.

Incorporated by reference in this
Form 10-K
is the information appearing under the headings Security
Ownership of Principal Shareholders and Management and
Equity Compensation Plan Information in our Proxy
Statement.

Incorporated by reference in this
Form 10-K
is the information appearing under the headings Certain
Relationships and Related Transactions and Election
of Directors  Board Matters and Meeting
Attendance in our Proxy Statement.

Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 30,
2007:

Wilsons The Leather
Experts Inc.

(registrant)

By:

/s/ Michael
M. Searles

Michael M. Searles

Chairman and Chief Executive
Officer

(principal executive
officer)

By:

/s/ Stacy
A. Kruse

Stacy A. Kruse

Chief Financial Officer and
Treasurer

(principal financial and
accounting officer)

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on March 30,
2007 by the following persons on behalf of the registrant and in
the capacities indicated:

We have audited the accompanying consolidated balance sheets of
Wilsons The Leather Experts Inc. and subsidiaries as of
February 3, 2007 and January 28, 2006, and the related
consolidated statements of operations, shareholders equity
and cash flows for each of the fiscal years in the three-year
period ended February 3, 2007. In connection with our
audits of the consolidated financial statements, we also have
audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Wilsons The Leather Experts Inc. and subsidiaries as
of February 3, 2007 and January 28, 2006, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended February 3,
2007, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Notes 1 and 11 to the consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, on
January 29, 2006. As discussed in Notes 1 and 14,
the Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, on January 29, 2006.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Wilsons The Leather Experts Inc. and
subsidiaries internal control over financial reporting as
of February 3, 2007, based on the criteria established in
Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 30, 2007
expressed an unqualified opinion on managements assessment
of, and the effective operations of, internal control over
financial reporting.

Wilsons The Leather Experts Inc. (Wilsons Leather or
the Company) a Minnesota corporation, is the leading
specialty retailer of quality leather outerwear, accessories and
apparel in the United States. At February 3, 2007, Wilsons
Leather operated 417 stores located in 45 states, including
287 mall stores, 116 outlet stores and 14 airport locations. The
Company supplemented its permanent stores with 118 and 102
temporary seasonal stores during its peak selling season from
October through January during fiscal years 2005 and 2004,
respectively. Operation of the Companys temporary seasonal
stores was suspended in 2006 and for the foreseeable future, but
may be reconsidered in the future.

Basis of
presentation

The accompanying consolidated financial statements include those
of the Company and all of its subsidiaries. All material
intercompany balances and transactions between the entities have
been eliminated in consolidation. At February 3, 2007,
Wilsons Leather operated in one reportable segment: selling
leather outerwear, accessories and apparel. The Companys
chief operating decision-maker evaluates revenue and
profitability performance on an enterprise basis to make
operating and strategic decisions.

As more fully described in Note 2, Reorganization and
partial store liquidation, on January 22, 2004, the
Company announced that it would liquidate up to 100
underperforming mall and outlet stores (subsequently revised to
111 stores) and eliminate approximately 950 store-related
positions. In addition, the Company announced the elimination of
approximately 70 positions at their corporate headquarters in
Brooklyn Park, Minnesota and their distribution center in Las
Vegas, Nevada and the closure of their distribution center in
Las Vegas, Nevada.

Fiscal
year

The Companys fiscal year ends on the Saturday closest to
January 31. The periods that will end or have ended
February 2, 2008, February 3, 2007, January 28,
2006, and January 29, 2005, are referred to herein as
fiscal years 2007, 2006, 2005, and 2004, respectively. Fiscal
years 2007, 2005 and 2004 are 52 week years. Fiscal 2006
consisted of 53 weeks.

Use of
estimates

The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Matters of
significance in which management relies on these estimates
relate primarily to the realizability of assets, such as
accounts receivable, property and equipment, and inventories,
and the adequacy of certain accrued liabilities and reserves.
Ultimate results could differ from those estimates.

Fair
values of financial instruments

The carrying value of the Companys current financial
assets and liabilities, because of their short-term nature,
approximates fair value.

Cash and
cash equivalents

Cash equivalents consist principally of short-term investments
with original maturities of three months or less and are
recorded at cost, which approximates fair value. The short-term
investments consist solely of money market

funds. Interest income of $1.6 million, $0.9 million
and $0.3 million in fiscal years 2006, 2005 and 2004,
respectively, is included in interest expense, net in the
accompanying statements of operations.

Inventories

The Company values its inventories, which consist primarily of
finished goods held for sale that have been purchased from
domestic and foreign vendors, at the lower of cost or market
value, determined by the retail inventory method on the
last-in,
first-out (LIFO) basis. As of February 3, 2007
and January 28, 2006, the LIFO cost of inventories
approximated the
first-in,
first-out cost of inventories. The inventory cost includes the
cost of merchandise, freight, duty, sourcing overhead, and other
merchandise-specific charges. A periodic review of inventory
quantities on hand is performed to determine if inventory is
properly stated at the lower of cost or market. Factors related
to current inventories such as future consumer demand, fashion
trends, current aging, current and anticipated retail markdowns,
and class or type of inventory are analyzed to determine
estimated net realizable values. A provision is recorded to
reduce the cost of inventories to the estimated net realizable
values, if required.

Permanent markdowns designated for clearance activity are
recorded at the point of decision, when utility of inventory has
diminished, versus the point of sale. Factors considered in the
determination of permanent markdowns include current and
anticipated demand, customer preferences, age of the
merchandise, and style trends. The corresponding reduction to
gross margin is also recorded in the period that the decision is
made.

Shrinkage is estimated as a percentage of sales for the period
from the last inventory date to the end of the fiscal year.
Physical inventories are taken at least biannually for all
stores and distribution centers and inventory records are
adjusted accordingly. The shrink rate for the most recent
physical inventory, in combination with current events and
historical experience, is used as the accrual rate to record
shrink for the next inventory cycle.

Any significant unanticipated changes in the factors noted above
could have a significant impact on the value of the
Companys inventories and its reported operating results.

Inventories consisted of the following (in thousands):

February 3,

January 28,

2007

2006

Raw materials

$

2,940

$

2,040

Finished goods

71,957

83,605

Total

$

74,897

$

85,645

Property
and equipment

The Companys property and equipment consist principally of
store leasehold improvements and store fixtures and are included
in the Property and equipment line item in its
consolidated balance sheets included in this report. Leasehold
improvements include the cost of improvements funded by landlord
incentives and lease costs during the pre-opening period of
construction, renovation, fixturing, and merchandise placement
(the build-out period). Prior to the third quarter
of 2005, the Company capitalized rental costs incurred during
the build-out period. Beginning with the third quarter of 2005,
the Company has expensed all such build-out period rental costs
pursuant to Financial Accounting Standards Board
(FASB) Staff Position
No. FAS 13-1
(FSP
FAS 13-1).
Leasehold improvements are recorded at cost and are amortized
using the straight-line method over the lesser of the applicable
store lease term or the estimated useful life. The typical
initial lease term for the Companys stores is
10 years and the estimated useful lives of the assets range
from three to 10 years. Capital additions required for
lease extensions subsequent to initial lease term are amortized
over the term of the lease extension. Computer hardware and
software and distribution center equipment are amortized over
three to five years and 10 years, respectively. Property
and equipment retired or disposed of are removed from cost and
related accumulated depreciation accounts. Maintenance and
repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after

making the necessary adjustment to the asset and accumulated
depreciation accounts for the items renewed or replaced.

Store
closing and impairment of long-lived assets

The Company continually reviews its stores operating
performance and assesses plans for store closures. Losses
related to the impairment of long-lived assets are recognized
when expected future cash flows are less than the assets
carrying value. When a store is closed or when a change in
circumstances indicates the carrying value of an asset may not
be recoverable, the Company evaluates the carrying value of the
asset in relation to its expected future cash flows. If the
carrying value is greater than the expected future cash flows, a
provision is made for the impairment of the asset to write the
asset cost down to its estimated fair value. In the fourth
quarter of 2006, the Company determined, based on its most
recent sales projections for various markets in which Wilsons
Leather has stores, that the current estimate of the future
undiscounted cash flows in certain of these markets would not be
sufficient to recover the carrying value of those markets
mall store fixed assets. Accordingly, the Company recorded an
impairment loss of $0.7 million in the fourth quarter of
2006 related to those mall stores assets. Such assets were
written down to fair-value less the expected disposal value, if
any, of such furniture, fixtures and equipment. The Company
determined that these assets had no fair value, as the majority
of such assets relate to leasehold improvements and other
store-specific fixtures and equipment. This impairment charge
was recorded as a component of selling, general and
administrative expenses. During 2005 and 2004, the
Companys impairment testing did not indicate any
impairment and no such charge was recorded in either year. As
discussed in Note 2, Reorganization and partial store
liquidation, accelerated depreciation was recorded in 2004
for the liquidation stores throughout the term of the
liquidation sale.

When a store under a long-term lease is to be closed, the
Company records a liability for any lease termination or broker
fees at the time an agreement related to such closing is
executed. At February 3, 2007 and January 28, 2006,
the Company had no amounts accrued for store lease terminations.

Debt
issuance costs

Debt issuance costs are amortized on a straight-line basis over
the life of the related debt. Accumulated amortization amounted
to approximately $4.0 million and $3.9 million at
February 3, 2007 and January 28, 2006, respectively.
Amortization expense is included in interest expense in the
accompanying consolidated statements of operations.

Operating
leases

The Company has approximately 418 noncancelable operating
leases, primarily for retail stores, which expire at various
times through 2017. These leases generally require the Company
to pay costs, such as real estate taxes, common area maintenance
costs and contingent rentals based on sales. In addition, these
leases generally include scheduled rent increases and may
include rent holidays. The Company accounts for these scheduled
rent increases and rent holidays on a straight-line basis over
the initial terms of the leases, including any rent holiday
periods, commencing on the date the Company can take possession
of the leased facility. Resulting liabilities are recorded as
short-term or long-term deferred rent liabilities as
appropriate. Rent expense for lease extensions subsequent to the
initial lease terms are also calculated under a straight-line
basis to the extent that they include scheduled rent increases
or rent holidays. In addition, leasehold improvements funded by
landlord incentives are recorded as short-term or long-term
deferred rent liabilities as appropriate. These liabilities are
then amortized as a reduction of rent expense on a straight-line
basis over the life of the related lease. Prior to the third
quarter of 2005, the Company capitalized rental costs incurred
during the build-out period. Beginning with the third quarter of
2005, the Company has expensed all such build-out period rental
costs pursuant to FSP
FAS 13-1.

The Company recognizes sales upon customer receipt of the
merchandise generally at the point of sale. The Company has
historically recognized layaway sales in full upon final payment
and delivery of the merchandise to the customer. All customer
payments prior to the final payment were recorded as customer
deposits and included in accrued expenses in the Companys
balance sheet. As of December 2006, the Companys layaway
program was discontinued and all layaway sales had been
recognized by fiscal year end. Revenue for gift card sales and
store credits is recognized at redemption. A reserve is provided
at the time of sale for projected merchandise returns based upon
historical experience. The Company recognizes revenue for
on-line sales at the time goods are received by the customer. An
allowance for on-line sales is recorded for shipments in-transit
at period end, as product is shipped to these customers Free on
Board destination. Revenue on sales to wholesale customers is
recognized upon the transfer of title and risk of ownership to
such customers, which is generally upon shipment, as our
standard terms are Free on Board origin. Wholesale revenue is
recorded net of trade-term discounts and estimated returns and
allowances. Generally, there are no return rights other than
those for merchandise that is defective or in breach of any
express warranties. Wholesale revenues may be recognized post
shipment if the contractual shipping or
right-of-return
terms differ from the Companys standard terms.

Store
opening costs

Non-capital expenditures, such as advertising and payroll costs
related to new store openings, are charged to expense as
incurred.

Advertising
costs

Advertising costs included in selling, general and
administrative expenses, are expensed when incurred. Advertising
costs amounted to $9.0 million, $8.5 million and
$8.4 million, in 2006, 2005 and 2004, respectively.
Included in the Companys balance sheet in Prepaid
expenses are prepaid advertising costs of approximately
$0.7 million and less than $0.1 million as of
February 3, 2007 and January 28, 2006, respectively.

Income
taxes

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. In light of cumulative losses over the past five
fiscal years, the Company believes this it is more likely than
not that the Companys net deferred tax asset will not be
realized. Accordingly, a full valuation allowance has been
recorded against the Companys net deferred tax assets.

Sales
taxes

The Company presents sales taxes on a net basis in its
consolidated financial statements. For all periods presented,
the Companys sales are recorded net of applicable sales
taxes.

Foreign
currency translation

The functional currency for the Companys foreign
operations is the applicable foreign currency. The translation
from the applicable foreign currency to U.S. dollars is
performed for balance sheet accounts using the current exchange
rate in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during
the period. The gains or losses resulting from such translation
are included in

shareholders equity as other comprehensive income (loss)
and have been insignificant in all fiscal years presented.
Transaction gains and losses are reflected in income. The
Company did not enter into any hedging transactions during 2006,
2005 or 2004.

Income
(loss) per share

Basic net income (loss) per share is computed by dividing the
net income (loss) by the weighted average number of common
shares outstanding during the year. Diluted net income (loss)
per share is computed by dividing the net income (loss) by the
sum of the weighted average number of common shares outstanding
plus all additional common shares that would have been
outstanding if potentially dilutive common shares related to
stock options and stock warrants had been issued, calculated
using the treasury stock method. Pursuant to the treasury
method, in periods of net loss, potentially dilutive common
shares related to stock options and warrants have been excluded
from the calculation of weighted average shares outstanding, as
their inclusion would have an anti-dilutive effect on net loss
per share. The following table reconciles the number of shares
utilized in the net income (loss) per share calculations (in
thousands):

For the years ended

February 3,

January 28,

January 29,

2007

2006

2005

Weighted average common shares
outstanding  basic

39,154

38,994

31,275

Effect of dilutive securities:
stock options



110



Effect of dilutive securities:
warrants



1,663



Weighted average common shares
outstanding  diluted

39,154

40,767

31,275

The total dilutive potential common shares excluded from the
above calculations in 2006 and 2004, periods of net loss, were
128,560 and 781,745, respectively, as their inclusion would have
had an anti-dilutive effect on net loss per share.

Stock-based
compensation

On January 29, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R), which requires the
recognition of compensation expense in an amount equal to the
fair market value of share-based payments granted to employees
and non-employee directors. These share-based payments include
employee stock options, employee stock purchases related to the
Companys employee stock purchase plan and other
stock-based awards (stock-based compensation). Prior
to January 29, 2006, the Company accounted for employee
stock-based compensation using the intrinsic-value method
pursuant to Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and its related
implementation guidance under which no compensation cost had
been recognized. As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123), the Company adopted
the disclosure provisions for employee stock-based compensation
and only disclosed such compensation pro forma in the notes to
the consolidated financial statements.

The Company adopted SFAS No. 123R using the modified
prospective transition method. Under this method, the Company
recognizes compensation costs for new grants of stock-based
awards, awards modified on or after the effective date of
January 29, 2006 and the remaining portion of the fair
value of the unvested awards at January 29, 2006. The
Companys consolidated financial statements as of and for
the fiscal year ended February 3, 2007 reflect the impact
of SFAS No. 123R. In accordance with the modified
prospective transition method, prior periods have not been
restated and do not include the impact of
SFAS No. 123R.

SFAS No. 123R requires companies to measure the cost
of stock-based awards based on the fair value of the award at
the date of grant. In measuring the value of stock-based
compensation under SFAS No. 123R, or previously under
SFAS No. 123, the Company uses the Black-Scholes
option pricing model to estimate the grant date fair value of
each stock-based award. The Companys estimates of fair
value are affected by the price of the Companys common
stock, the nature of the share-based award and other complex and
subjective variables including but not limited to, expected term
of the stock-based awards, the expected volatility of the
Companys stock price over the term of the award and actual
and projected employee stock option behavior.

The following weighted average assumptions were used in the
Black-Scholes option pricing model to estimate the grant date
fair value of awards granted:

For the years ended

February 3,

January 28,

January 29,

2007

2006

2005

Expected term (in years)

4

.1

4

.5

4

.7

Expected volatility

68

.4%

69

.5%

67

.3%

Risk-free interest rate

4

.8%

3

.9%

3

.5%

Dividend yield

0

.0%

0

.0%

0

.0%

Weighted Average fair value of
options granted

$

1

.82

$

3

.35

$

2

.61

The weighted average expected term reflects the period of time
for which options are expected to be outstanding. That is, from
grant date to expected exercise or other expected settlement.
The Companys calculation of expected term is based on
historical experience of its option plans as well as
expectations of future employee stock option behavior. The
expected volatility of the Companys stock price is based
on the actual historical volatility over a period that is
commensurate to the expected term of the option. The risk-free
interest rate is based on the average implied yield on
U.S. Treasury instruments with a term approximating the
expected term of the option. The expected dividend yield is
zero, as the Company has not declared a dividend in the past and
the ability to pay cash dividends in the future is limited by
certain provisions in the Companys senior credit facility.

The Companys SFAS No. 123R fair value
calculations are based on a single-option valuation approach and
applicable compensation cost is recognized on a straight-line
basis over the vesting period of the stock-based award. A
similar approach was taken for periods prior to January 29,
2006 under SFAS No. 123 for the required pro forma
disclosures. In addition, the amount of stock-based compensation
cost recognized during a period is based on the value of the
portion of the awards that are ultimately expected to vest.
SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In
the pro forma disclosures required under SFAS No. 123
for the periods prior to 2006, the Company factored estimated
forfeitures as of the grant date into the compensation expense
to be recognized. Pursuant to SFAS No. 123R, the
stock-based compensation expense recognized in 2006 has been
reduced for estimated forfeitures. The estimated forfeiture rate
is based on historical experience of the Companys option
plans and any adjustment to the forfeiture rate in the future
will result in a cumulative adjustment in the period that this
estimate is changed. Ultimately, the total compensation expense
recognized for any given stock-based award over its vesting
period will only be for those shares that actually vest.

Stock-based compensation expense recognized under
SFAS No. 123R for 2006 totaled $2.3 million
before income taxes primarily for expenses related to employee
stock options. All of the Companys stock-based
compensation is recognized as part of selling, general and
administrative expenses. Had compensation cost for stock-based
awards been determined and recorded consistent with
SFAS No. 123 in prior years, the Companys net

loss and basic and diluted net loss per share would have been
the following pro forma amounts (in thousands, except per share
amounts):

For the years ended

January 28,

January 29,

2006

2005

Net income (loss):

As reported

$

12,212

$

(23,583

)

Stock based employee compensation
expense included in net income (loss)



828

Stock based employee compensation
determined under fair value based method for all
awards(1)

(2,285

)

(2,987

)

Pro forma income (loss)

$

9,927

$

(25,742

)

Basic income (loss) per
share:

As reported

$

0.31

$

(0.75

)

Stock based employee compensation
expense included in net income (loss)



0.03

Stock based employee compensation
determined under fair value based method for all
awards(1)

(0.06

)

(0.10

)

Basic pro forma income (loss)

$

0.25

$

(0.82

)

Diluted income (loss) per
share:

As reported

$

0.30

$

(0.75

)

Stock based employee compensation
expense included in net income (loss)



0.03

Stock based employee compensation
determined under fair value based method for all
awards(1)

(0.06

)

(0.10

)

Diluted pro forma income (loss)

$

0.24

$

(0.82

)

(1)

For 2004, $1.1 million of pro forma expense was due to
stock option acceleration from the private placement equity
transaction that occurred in July of 2004. See Note 10,
Capital stock.

For purposes of this pro forma disclosure, the value of the
stock options was estimated using the Black-Scholes option
pricing model and amortized to expense over the options
vesting periods. Pro forma disclosures for 2006 are not
presented, as the amounts are recognized in the consolidated
financial statements.

In addition to the recognition of expense in the financial
statements, under SFAS No. 123R, any excess tax
benefits received upon exercise of options are to be presented
as financing activity inflow in the statement of cash flows.
Prior to the adoption of SFAS No. 123R, all tax
benefits resulting from the exercise of stock options were
included as operating cash flows. However, due to Wilsons
Leathers net operating loss carryforward position and the
valuation allowance recorded against the Companys deferred
tax assets, there is no cash flow effect for any excess tax
benefits from stock option exercises for 2006. Excess tax
benefits will be recorded when a deduction realized for income
tax purposes related to settlement of a stock-based award
exceeds the compensation costs recognized for financial
reporting purposes.

New
accounting pronouncements

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which is effective for
fiscal years beginning after November 15, 2007 and for
interim periods within those years. This

statement defines fair value, establishes a framework for
measuring fair value and expands the related disclosure
requirements. The Company is currently evaluating the impact of
SFAS No. 157 on its consolidated financial statements.

In September 2006, the Staff of the SEC issued Staff Accounting
Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(SAB No. 108). SAB No. 108
provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for
the purpose of determining whether the current years
financial statements are materially misstated.
SAB No. 108 requires registrants to apply the new
quantification guidance to errors in existence at the beginning
of the first fiscal year ending after November 15, 2006 by
correcting errors deemed to be material under this new
quantification method through a one-time cumulative effect
adjustment to
beginning-of-the-year
retained earnings. Upon adoption of SAB No. 108, the
Company recorded a one-time cumulative effect income adjustment
to its beginning retained earnings for the fiscal year ended
February 3, 2007 of $1.0 million, net of tax. See
Note 14, Staff Accounting
Bulletin No. 108 for additional information on
the adoption of SAB No. 108.

In July 2006, the FASB issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 clarifies
the accounting for and disclosure of uncertainty in income taxes
recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company estimates that the adoption
of FIN 48 in 2007 will result in an immaterial change of
its tax reserves, which would be accounted for as a cumulative
adjustment to the February 4, 2007 balance of retained
earnings.

In June 2006, the FASB issued Emerging Issues Task Force Issue
(EITF)
No. 06-3,How Sales Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (EITF
06-3),
which discusses the presentation of sales taxes in the income
statement on either a gross or net basis. It requires entities
to disclose, if significant, on an interim and annual basis for
all periods presented: (a) the accounting policy elected
for these taxes and (b) the amounts of the taxes reflected
gross (as revenues) in the income statement. The guidance is
effective for periods beginning after December 15, 2006.
The Company presents sales net of applicable sales taxes. With
the adoption of EITF
06-3 in the
first quarter of fiscal 2007, the Company will not change its
method for recording sales taxes net in the consolidated
financial statements.

In November 2004, the FASB issued SFAS No. 151,
Inventory Costs (SFAS No. 151).
SFAS No. 151 amends Accounting Research
Bulletin No. 43 to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
spoilage. SFAS No. 151 also requires the allocation of
fixed production overheads to inventory be based on normal
production capacity. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005 and, accordingly, the Company adopted
SFAS No. 151 in the first quarter of 2006. Adoption of
SFAS No. 151 did not have a significant impact on the
Companys consolidated financial statements.

2

Reorganization
and partial store liquidation

On January 22, 2004, the Company announced that it would
liquidate up to 100 underperforming mall and outlet stores
(subsequently revised to 111 stores  the
liquidation stores) and eliminate approximately 950
store-related positions. The Company entered into an Agency
Agreement with a joint venture comprised of Hilco Merchant
Resources, LLC, Gordon Brothers Retail Partners, LLC and Hilco
Real Estate, LLC (the Hilco/Gordon Brothers Joint
Venture) to liquidate the inventory in the 111 stores and
assist in the discussions with landlords regarding lease
terminations in approximately 94 of these stores. Pursuant to
the Agency Agreement, the Hilco/Gordon Brothers Joint Venture
guaranteed to pay the Company an amount of 84% of the cost value
of the inventory

at the liquidation stores, subject to certain adjustments. The
Hilco/Gordon Brothers Joint Venture was responsible for all
expenses related to the sale. The liquidation stores were
selected based on strategic criteria, including negative sales
and earnings trends, projected real estate costs, location, and
financial conditions within the market. In addition, the Company
announced that it would eliminate approximately 70 positions at
its corporate headquarters in Brooklyn Park, Minnesota and its
distribution center in Las Vegas, Nevada, close its distribution
center in Las Vegas, Nevada and write off essentially all
remaining assets located at its distribution centers in Maple
Grove, Minnesota and Las Vegas, Nevada.

The Company recorded charges related to the restructuring and
partial store liquidation of $27.4 million during 2004
primarily related to the transfer of inventory to an independent
liquidator in conjunction with the closing of the liquidation
stores, lease termination costs, accelerated depreciation, asset
write-offs related to store closings, severance, and other
restructuring charges. In 2004, a total of $17.4 million
and $13.8 million of these charges were recorded in
selling, general and administrative expenses and depreciation
and amortization, respectively, as partially offset by
$3.8 million of gross margin earned on the liquidation
sales. The liquidation sales were completed in April 2004 and as
of May 1, 2004, all the liquidation stores had been closed.
As of October 30, 2004, the Company had successfully
negotiated all of its lease terminations.

3

Discontinued
operations

In November 2002, the Company liquidated its Travel Subsidiaries
(El Portal Group, Inc., Bentleys Luggage Corp. and Florida
Luggage Corp.), which were presented as a discontinued
operation. In 2004, the Company recorded $0.3 million in
income from discontinued operations representing the reversal of
the 2004 balance of the discontinued operations liabilities,
related to lease termination and store closing costs, that were
no longer required. This resulted in $0.2 million in income
from discontinued operations net of tax, or $0.01 net
income per share. As of February 3, 2007 and
January 28, 2006, there were no assets or liabilities
related to the discontinued operations of the Company.

4

Other
assets

Other assets consisted of the following (in thousands):

February 3,

January 28,

2007

2006

Debt issuance costs

$

5,219

$

5,384

LessAccumulated amortization

(4,027

)

(3,867

)

Debt issuance costs, net

1,192

1,517

Other intangible assets, net

58

59

Total

$

1,250

$

1,576

Other intangible assets are being amortized over periods of five
to 15 years. Amortization expense related to other
intangible assets for the year ended February 3, 2007 was
insignificant. Future amortization expense for each of the five
succeeding fiscal years, based on the other intangible assets as
of February 3, 2007, will be insignificant.

General Electric Capital Corporation and a syndicate of banks
have provided the Company with a senior credit facility, as
amended, that provides for borrowings of up to
$135.0 million in aggregate principal amount, including a
$20.0 million Term B promissory note and a
$75.0 million letter of credit subfacility. The senior
credit facility expiration is June 30, 2010, at which time
all borrowings, including the Term B promissory note, become due
and payable.

The Term B promissory note is collateralized by the
Companys equipment. The remainder of the senior credit
facility is collateralized by the Companys inventory,
equipment, credit card and wholesale receivables, and
substantially all other personal property. Through the third
quarter of 2005, interest was payable on revolving credit
borrowings at variable rates determined by the applicable LIBOR
(seven to 30 days) plus 1.50%, or the prime rate plus 0.25%
(commercial paper rate plus 1.50% if the loan is made under the
swing line portion of the revolver). Commencing with
the fourth quarter of 2005, interest was payable on revolving
credit borrowings at variable rates determined by the applicable
LIBOR plus 1.25% to 1.75%, or the prime rate plus 0.0% to 0.5%
(commercial paper rate plus 1.25% to 1.75% if the loan is made
under the swing line portion of the revolver). With
respect to the Term B promissory note, the interest rate in 2005
was the prime rate plus 4.0%, plus an additional 2.75% pursuant
to a separate letter agreement with General Electric Capital
Corporation. On January 31, 2006, the Company executed
another letter agreement with General Electric Capital
Corporation whereby the additional 2.75% was no longer
applicable. As of December 29, 2006, interest is payable on
revolving credit borrowings at variable rates determined by the
applicable LIBOR plus 1.25% to 1.75%, or the prime rate plus
0.0% to 0.5% (commercial paper plus 1.25% to 1.75% if the loan
is made under the swing line portion of the
revolver). Interest is payable on the Term B promissory note at
a variable rate equal to the LIBOR plus 4.0%. The applicable
margins will be adjusted quarterly on a prospective basis as
determined by the previous quarters ratio of borrowings to
borrowing availability. The Company pays monthly fees of
0.25% per annum on the unused portion of the senior credit
facility, as defined, and per annum fees on the average daily
amount of letters of credit outstanding during each month
ranging from .625% to .875% in the case of trade letters of
credit and from 1.25% to 1.75% in the case of standby letters of
credit. Such fees are subject to quarterly adjustment in the
same manner as our interest rate margins. Prepayment of the Term
B promissory note is payable only with the consent of the senior
lenders. Any such prepayment would be subject to a 1.0%
prepayment fee if prepayment is made on or prior to
June 30, 2008, and a 0.5% prepayment fee if prepayment is
made after June 30, 2008 but on or prior to June 30,
2009. After June 30, 2009, any remaining balance of the
Term B promissory note is prepayable without penalty. The
revolving credit portion of the senior credit facility is
subject to a 1.0% prepayment fee under most circumstances.

The senior credit facility contains certain restrictions and
covenants, which, among other things, restrict the
Companys ability to acquire or merge with another entity;
make investments, loans or guarantees; incur additional
indebtedness; create liens or other encumbrances; or pay cash
dividends or make other distributions. At February 3, 2007,
the Company was in compliance with all covenants related to the
senior credit facility.

Wilsons Leather plans to use the senior credit facility for
immediate and future working capital needs. The Company is
dependent on the senior credit facility to fund working capital
and letter of credit needs. Based on the Companys current
2007 plan, the Company believes that the borrowing capacity
under its senior credit facility, together with cash on hand,
current and anticipated cash flow from operations, and cost
reductions associated with the Companys lower store count
will be adequate to meet its working capital and capital
expenditure requirements through the first half of 2008.
However, if the Companys comparable store sales do not
increase as planned in the second half of 2007, the Company
expects that additional financing may be needed in 2008 in order
to fund its working capital and capital expenditure
requirements. Even if the Companys performance during 2007
is on track with plan, the Company may also seek to obtain
additional financing during 2007 for 2008 working capital needs
as well as the ability to accelerate implementation of its
merchandise and brand acceptance strategies. The Company is
currently exploring various financing strategies. There can be
no assurance that additional financing would be possible or
could be obtained on terms favorable to the Company, or at all.

At February 3, 2007 and January 28, 2006, there were
no borrowings under the revolving portion of the senior credit
facility. At February 3, 2007 and January 28, 2006,
there were $3.8 million and $4.3 million,
respectively, in letters of credit outstanding. The Term B
promissory note had a balance of $20.0 million on
February 3, 2007 and January 28, 2006.

As of February 3, 2007, annual debt maturities were as
follows (in thousands):